SpringMan wrote:I understand individual bonds can be held to maturity and by doing so you get your initial purchase back.
SpringMan wrote:Individual bonds still fluctuate in price on the secondary market.
SpringMan wrote:I watched Suze Orman on CNBC last night.
thirdcamper wrote:Bond funds entail paying the expense ratio. However, bond funds have the advantage of diversification across the entire bond market. For most individual investors, especially those who don't understand the intricacies of bonds, funds make perfect sense.
I also admit to not understanding intricacies of bonds.
SpringMan wrote:I watched Suze Orman on CNBC last night. She was adamant about investors not buying bond funds. She recommended people roll old 401ks to a discount brokerage IRA so they can purchase bonds or ETFs.
My understanding was that she was recommending stock ETFs. This was not clarified but why would she recommend a bond ETF when she does not like bond funds? She did not come across as a boglehead, IMHO.
Doesn't Ms. Orman invest heavily in treasury bonds? This might have colored her opinion of bonds and bond funds. If pressed, she might say that one should invest in treasury bonds and not corporate???
You give the pros of individual bonds. Are you in Suze's camp regarding bond funds being bad? I have owned individual bonds in the past and when you go on the web to view your brokerage account, the bonds are marked to market in your account. Older folks may not live long enough to hold an intermediate or long bond to maturity. If you sell a bond on the secondary market you will pay a commission. Diversity is another benefit of the funds.
An ER of .8 is far too expensive for me. But what are your alternatives?
georgepds wrote:FWIIW, Orman is not the only one who raises this issue . . The issue is that bond funds fluctuate in value, but that individual bonds (held to maturity, provided that there is no default) do not fluctuate in principal . . . if you hold to maturity you get all your principal back.
tarnation wrote:In the movie "Maxed Out" Scurlock shows her stressing the importance of FICO scores and then claims she has a deal with FICO's parent company. Maybe she has a deal with bond issuers
magellan wrote:Many students (and perhaps Ms. Orman as well) don't seem to understand that whether you sell the bond immediately or hold it to maturity, your overall financial well-being is no different. If rates go up, the value of the bond, as defined as the present value of all future payments, goes down.
Prokofiev wrote:georgepds wrote:.. The issue is that bond funds fluctuate in value, but that individual bonds (held to maturity, provided that there is no default) do not fluctuate in principal . . . if you hold to maturity you get all your principal back.
Well, sure. That part IS true. But it is totally misleading.
You buy a 30-yr bond at 5% and suddenly rates jump to 10% due to high inflation. Wow! You just just lost almost 50% of your investment. Much better to hold the 5% bond for 30 years, right? NO, in a 10% rate environment you lose out to inflation by holding the low yielding bond those 30 years (5% vs 10%) and then get you finally get $1000 bucks back . . . although it is worth only 8% of what you paid!
Holding to maturity to avoid marking to market solves NOTHING.
nisiprius wrote:The part I don't understand is why I should care about the market value of the bond if I have no intention of selling it prior to maturity. A lot of these explanations I've been seem to me assume that an individual investor has no control at all over his investment policy.
azxcvbnm321 wrote:One huge difference between bonds and bond funds is that bond funds never mature so when you cash out of a bond fund, you are in effect, selling your bonds at market price.
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