I watched the show last night too, and saw Suze once again tell people to buy individual bonds instead of bond funds. I like Suze and enjoy her show. I like a lot of the advice she gives, and I'm not a Suze basher, as are many people on this forum and around the internet. However, I continue to scratch my head at the advice she gives people about buying individual muni bonds rather than bond funds. It just makes no sense.
Suze argues that bond funds lose value because they have no defined maturity date, whereas individual bonds can be held until maturity and then give you the principal back in full. This is an overly simplistic argument.
If I buy a bond for $100.00 that pays 5% interest for 20 years, and interest rates go up, I will have to sell the bond at a discount to liquidate it. The bond will only hold its value if I keep it for 20 years. However, doing so means I will be accepting a lower return than what current bonds are paying, and doing so for 20 years will cost me a substantial amount of lost opportunity to earn a higher yield. I believe Suze focuses on the psychological aspect here that as long as you hold the bond for 20 years it will always return your $100.00, where the bond funds can lose money each day, thus resulting in a lower net asset value. In reality, the individual bond is losing money every day too in an environment where interest rates are rising. You are just not paying attention to it because it's not as easy to determine the current market value of an individual bond as it is a bond fund, which has an ending value each day the market is open.
In the end, every article I've read has suggested that bond funds are generally better vehicles for the average investor who wants bond exposure. It is suggested that you must invest at least $300K in individual bonds to create enough diversification to make it worthwhile. And, you either need to find a bond broker you really trust who will not rip you off, or become an expert yourself in buying bonds. Either way seems somewhat difficult for the average investor to do.
Suze may have the skill to personally select individual municipal bonds, but for those of us who don't want to take the time to learn how to do so, a bond fund with a low expense ratio is still the best way to have exposure to bond funds in a well diversified portfolio.