Is individual Bonds better than Bond Fund?

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kotsp
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Is individual Bonds better than Bond Fund?

Post by kotsp »

I was watching Suze Orman's show on PBS. She mentioned she do not like bond funds, but opt for individual bonds. Her rationale was that bonds have maturity dates while bond funds do not have. Her concern was in the periods of raising interest rates, why would anyone go on bond funds hevy near retirement.

My thinking is how does this matter when bond funds keep redeeming matured bonds and buying new ones within the funds?

What do members here think?
retiredjg
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Re: Is individual Bonds better than Bond Fund?

Post by retiredjg »

I don't have an opinion on bonds vs bond funds.

What I know for sure is that most people do not have the knowledge, time, or energy to buy the individual bonds to make a reasonable bond portfolio. Many would just not do it. Many would mess it up. I'm not going there and I'm not going to pay someone to do it for me.

I'll take a bond fund any day. :D
UpperNwGuy
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Re: Is individual Bonds better than Bond Fund?

Post by UpperNwGuy »

My two cents:

1. Suze Orman is discounting the fact that the bond funds hold bonds that each have a maturity date, so holding a fund is no different than an individual investor holding a bunch of bonds with different maturity dates.

2. Individual bonds have much greater risk than do the bond funds.

3. Selecting and buying individual bonds is a lot more work than buying shares in a fund.
invst65
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Re: Is individual Bonds better than Bond Fund?

Post by invst65 »

I mostly buy individual bonds and although I don't want to wade into an argument about which is better, one thing I will say is that, in my experience with Fidelity, buying individual bonds is not difficult at all. And there are no fees involved.

Having said that, Suzie Orman isn't someone I would look to for any kind of financial advice.
Dottie57
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Re: Is individual Bonds better than Bond Fund?

Post by Dottie57 »

kotsp wrote: Mon Jun 18, 2018 8:56 am I was watching Suze Orman's show on PBS. She mentioned she do not like bond funds, but opt for individual bonds. Her rationale was that bonds have maturity dates while bond funds do not have. Her concern was in the periods of raising interest rates, why would anyone go on bond funds hevy near retirement.

My thinking is how does this matter when bond funds keep redeeming matured bonds and buying new ones within the funds?

What do members here think?
Some iShares bond ETFs terminate in a specific year . So if you hold to the termination date all principal is disbursed.

The ETFs are from Blackrock.
Last edited by Dottie57 on Mon Jun 18, 2018 9:28 am, edited 1 time in total.
dbr
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Re: Is individual Bonds better than Bond Fund?

Post by dbr »

For the purpose of maintaining a portfolio for retirement withdrawals there is no advantage to holding individual bonds rather than a fund except in people's heads.

One should read here: https://www.bogleheads.org/wiki/Individ ... _bond_fund
lack_ey
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Re: Is individual Bonds better than Bond Fund?

Post by lack_ey »

With individual bonds you get more control on effectively the cash flows, choosing when to buy and sell. You get to determine the risk exposures, maturity dates, and what to do.

But that doesn't really have to do with rising interest rates or interest rate risk. Bonds have risk whether held directly or in a fund. It's the same securities and the same risk.

For liability matching, a ladder is a little bit more certain, but this could be approximated fairly closely using a combination of bond funds (which is surely not as complicated as managing a large number of individual bonds), shifting weights over time. And if you own any nontrivial amount of stocks, that results in greater uncertainty anyway. It's not like most people have fixed, predictable liabilities anyway.
dbr
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Re: Is individual Bonds better than Bond Fund?

Post by dbr »

lack_ey wrote: Mon Jun 18, 2018 9:38 am With individual bonds you get more control on effectively the cash flows, choosing when to buy and sell. You get to determine the risk exposures, maturity dates, and what to do.
And then what do you do with that control and how much meaningful difference does it make? Also with control you acquire the burden to exercise it. It sounds like a good hobby but not necessarily good advice for most investors. I suspect the people who can and should hold individual bonds already know who they are.
Last edited by dbr on Mon Jun 18, 2018 9:41 am, edited 1 time in total.
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JamesSFO
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Re: Is individual Bonds better than Bond Fund?

Post by JamesSFO »

Suze has a lot of good advice; this is one thing I think she spreads too much FUD about. There are some reasons to hold a bond ladder (e.g., liability matching portfolio); however, more generally, a diversified bond fund is excellent.
dbr
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Re: Is individual Bonds better than Bond Fund?

Post by dbr »

JamesSFO wrote: Mon Jun 18, 2018 9:41 am Suze has a lot of good advice; this is one thing I think she spreads too much FUD about. There are some reasons to hold a bond ladder (e.g., liability matching portfolio); however, more generally, a diversified bond fund is excellent.
Yes, FUD is exactly what it is. This is not a service to anyone.
lack_ey
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Re: Is individual Bonds better than Bond Fund?

Post by lack_ey »

dbr wrote: Mon Jun 18, 2018 9:40 am
lack_ey wrote: Mon Jun 18, 2018 9:38 am With individual bonds you get more control on effectively the cash flows, choosing when to buy and sell. You get to determine the risk exposures, maturity dates, and what to do.
And then what do you do with that control and how much meaningful difference does it make? Also with control you acquire the burden to exercise it.
I didn't say it would make meaningful differences, but it's a basis for some considering it better. Better for some purposes, if not necessarily much so for end goals.

IIRC Suze Orman owns only bonds, no stocks? (but says most people should have stocks) In that case and with that level of assets I think it's more justified for at least some money. I'm not really familiar with the rationales and whatever she talks about, and my impression is that many people like to pretend that owning bonds individually somehow reduces the risk, especially when the point is made that (most) bond funds don't mature.
dbr
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Re: Is individual Bonds better than Bond Fund?

Post by dbr »

lack_ey wrote: Mon Jun 18, 2018 9:47 am
IIRC Suze Orman owns only bonds, no stocks? (but says most people should have stocks) In that case and with that level of assets I think it's more justified for at least some money. I'm not really familiar with the rationales and whatever she talks about, and my impression is that many people like to pretend that owning bonds individually somehow reduces the risk.
It is entirely possible that people with a lot of money and all of it in bonds possibly should be building their own portfolio of individual bonds. I think Larry Swedroe mentions something like $200 million as a good size to do that, but I may be miss-remembering. Of course he is talking about a point where the investor is hiring professional management. Suze has a net worth "larger" than $10 million, so I am not sure she is in that class.

I think you are right that the real impetus to think about holding individual bonds is the mistaken idea that there is less risk. That only applies to some very specific situations that are not what most of us are talking about.

It is true that putting together a very specific application such as an LMP TIPS ladder has to be done with individual bonds but the rationale there has little to do with durations, does have a preset cash flow (your idea does apply there), and is constructed relative to maturity. But I don't consider an LMP to be investing at all. It is a completely different idea similar to using all the money for an annuity.
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Cyclesafe
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Re: Is individual Bonds better than Bond Fund?

Post by Cyclesafe »

Suze Orman predicates her municipal bond recommendation with "find a good bond salesman and..."

Sure, if you eliminate risk because you have picked a clairvoyant (that has your best interests at heart), a muni bond ladder would be of equivalent (no) risk to a CD ladder. Suze is spot on with most stuff, but this recommendation has always given me pause....
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VaR
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Re: Is individual Bonds better than Bond Fund?

Post by VaR »

What kind of fixed income do you want to invest in?

I see nothing wrong with investing in a portfolio of individual treasurys or CDs. OTOH, I don't think it's practical for the individual investor to hold a sufficiently diversified credit portfolio.

Do you have predetermined lumpy cashflow needs? If so then you can custom tailor a bond portfolio with maturities that can satisfy your cash flow needs with bond that mature at the appropriate time, though you somewhat forgo the term premium by holding bonds close to maturity. Of course, as a result you end up with very little interest rate risk and so you don't need to overfund for your cashflows.

It also seems to me that when you end up having to rebalance your asset allocation, that your carefully constructed portfolio may become a bit muddled.

This all makes me think that individual treasurys or CDs have a place in a liability matching portfolio in retirement for 5-10 years of expenses, with a bond fund for the remainder of your fixed income allocation.
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rcjchicity
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Re: Is individual Bonds better than Bond Fund?

Post by rcjchicity »

Suze does a disservice to her average viewer-/readership with this advice. While there can be merits to holding individual bonds, as expressed in this thread, the average person in the accumulation phase does not have the means or investing knowledge to create a sufficiently diversified bond ladder.

FWIW, Suze is where I started my financial knowledge journey. I actually was a caller into her show in 2010 when backdoor Roths became available, to verify that it was indeed an option (wasn't a Boglehead then).

I later submitted a question asking her to clarify how someone in the retirement accumulation phase could be able to build a diversified individual bond portfolio, rebalance, etc. Never heard back on that one...
informal guide
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Re: Is individual Bonds better than Bond Fund?

Post by informal guide »

lack_ey wrote: Mon Jun 18, 2018 9:38 am With individual bonds you get more control on effectively the cash flows, choosing when to buy and sell. You get to determine the risk exposures, maturity dates, and what to do.

But that doesn't really have to do with rising interest rates or interest rate risk. Bonds have risk whether held directly or in a fund. It's the same securities and the same risk.

For liability matching, a ladder is a little bit more certain, but this could be approximated fairly closely using a combination of bond funds (which is surely not as complicated as managing a large number of individual bonds), shifting weights over time. And if you own any nontrivial amount of stocks, that results in greater uncertainty anyway. It's not like most people have fixed, predictable liabilities anyway.
Buying individual bonds does give you the possibility of better tailoring of credit quality, issuer or state selection, etc. But at least for municipal bonds, laddering is fraught with uncertainty too. Bonds may (or may not) be called, or even in some instances redeemed before a call date. IMHO, the diversification and simplicity of bond funds from a place like Vanguard is highly valuable. Moreover, I am confident that Vanguard (or other significant bond firms') credit analysis is much better than mine.

I do own a number of individual muni bonds and have done so for 10 years. I buy odd lots at attractive prices in the secondary market and hold until maturity or call. But I am suspicious that sellers of bonds in the secondary market may have inside information on potential redemption or credit issues. But for most, I believe bond funds are superior and over time, my holdings will tilt more to funds..
moehoward
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Re: Is individual Bonds better than Bond Fund?

Post by moehoward »

I had a nice bond portfolio but most have been called in the last 5-7 years because of their interest rate. The current problem for individual bonds now is yield. For any kind of safety and yield, you will pay a premium. My fixed portfolio is made up of iBonds/Bond funds/CDs.
DetroitRick
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Re: Is individual Bonds better than Bond Fund?

Post by DetroitRick »

Both have their place, and neither is by definition "better". It's more a matter of what best meets your specific needs. There are many risks in the fixed income world (such as rate, principal, call, default, etc.) and it helps to focus on what matters most to you. Don't be too quick to exclusively focus on any one risk. Personally, I mostly favor bond funds - but do use both (for different reasons).

When an investor assigns high value to return of principal (and expects not to sell before maturity, because both bonds and bond funds are marked to market), individual bonds can potentially better match their purpose. You KNOW, barring default (which you need to diversify against outside of the US Treasury world), you will get your principal back at maturity. Although there can be call risk too. And for some, the fixed interest payments of individual bonds also are important in managing their cash flow. It's not that these things make individual bonds better per se - against, it's just that might better match an investor's particular case.

On the other side of this is the credit management aspect of individual corporate and municipal bonds. It's a lot of work, and I think 2008 gave us adequate reasons not to just trust the S&P ratings. Good fixed income managers can bring talent and resources into this area.

There are areas of the bond market, where I would not be able to duplicate what my fund managers are doing either. One example - non-US corporates and gov't's, with selective currency hedging. I would have limited access and tremendously limited personal expertise. Of course, you can supplement your individual bond positions with specific funds to fill gaps if this matters to you.

Portfolio size is definitely a factor in moving deeply into individual bonds. It's hard to adequately diversify (term, type and issuer) without critical mass. I've found the experts to be all over the place on recommended minimum bond portfolio size.

For my entire investing life, I've felt that bond funds best meet my own personal needs. But I am currently timing some expected cash outflows, and in this rising rate environment prefer that they be covered by short-term individual bonds. Again, doing this is not better, just more in synch with my needs. With the current yield curve relatively flat, and with spreads not all that great, it is an easy decision for me. Which has not typically been true over my investing life.
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Re: Is individual Bonds better than Bond Fund?

Post by RustyShackleford »

This is probably a matter that should get this thread locked, as violating the rules against religious discussions :-)

People in these forums, who I believe are smarter than me about these matters, believe that bond funds are just fine, and a lot simpler than individual bonds. I personally like knowing exactly what my return is going to be for the next N months or years; so I buy a lot of CDs, both bank ones and brokered ones. I feel like I'm neither losing nor winning much by doing this - it just makes me feel good. If interest rates ever "normalize" (don't ask me what that means) I may switch to mostly funds.
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whodidntante
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Re: Is individual Bonds better than Bond Fund?

Post by whodidntante »

Individual bonds have their place, particularly treasuries which do not have credit risk realistically. That said, Suze Orman might actually be worse than Dave Ramsey, and Dave Ramsey is not a bar you want to limbo under.
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Re: Is individual Bonds better than Bond Fund?

Post by mcraepat9 »

No. Just no. Suze is wrong and her advice is inane on this topic.

Individual bonds are not safer than bond funds, and there’s nothing wrong with bond funds. You need them for diversification if we are talking about a muni fund or other “total bond” fund. Unless you are holding a multimillion dollar bond portfolio...

If you plan to only hold a Treasury bond fund, you could consider holding actual Treasurys to save on fund expense (since diversification is a red herring - all Treasurys have the same credit risk).
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Re: Is individual Bonds better than Bond Fund?

Post by pascalwager »

Bond funds, in the interest of convenience, encourage the investor to ignore premature redemptions and lost principle during rising rates. Individual bonds avoid this problem if the investor waits for his bonds to mature rather than selling early.

The individual investor needs to decide which is more important-–convenience or return of principle.
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FIREchief
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Re: Is individual Bonds better than Bond Fund?

Post by FIREchief »

The argument is 100% emotional and 0% analytical. That said, I do only hold individual bonds, but simply to avoid the ER of a fund or ETF.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
VaR
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Re: Is individual Bonds better than Bond Fund?

Post by VaR »

pascalwager wrote: Wed Jun 20, 2018 10:21 pm Bond funds, in the interest of convenience, encourage the investor to ignore premature redemptions and lost principle during rising rates. Individual bonds avoid this problem if the investor waits for his bonds to mature rather than selling early.

The individual investor needs to decide which is more important-–convenience or return of principle.
I don't understand what you mean. Would you please expand on this?
MrPotatoHead
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Re: Is individual Bonds better than Bond Fund?

Post by MrPotatoHead »

One thing that has changed of late is many municipal bond issues are now coming forward with only a single rating agency, meaning more due diligence is needed.

re:
http://www.governing.com/topics/finance ... trend.html
stlutz
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Re: Is individual Bonds better than Bond Fund?

Post by stlutz »

One can own a collection of individual bonds or one can own a bond fund which is a larger collection of individual bonds.

If anyone tries to convince you that a collection of individual bonds is substantially different from a collection if individual bonds they are talking nonsense. :oops:

This answer does not tell you which approach to take. Just pointing out there there is no meaningful difference between the two except diversification.

Diversification can be a huge advantage for funds over individual bonds when dealing with riskier bonds. Conversely, with Treasuries there is no need for maximum diversification and thus the fund only provides convenience for a small fee (and if it's not a very small fee you need to find a different fund).
rgs92
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Re: Is individual Bonds better than Bond Fund?

Post by rgs92 »

Suze has been saying this frequently for almost 20 years.

I never heard her mention any other type of bond to buy other than municipal/tax-free bonds.
So what kind of bond does one put in a tax-deferred account or a Roth IRA? Certainly not a tax-free instrument.

In all the years I watched her show, I never heard her say what kind of bonds belong in an IRA (Roth or otherwise).
She seemed to avoid this problem.

She is so negative about bond funds she even recommends not using target funds (or any kind of asset allocation fund that has bonds in it).

I sensed that she was so vehement about this because it was a signature recommendation of hers that was unique, in that nobody else ever shared this idea.

Maybe she got this notion from growing up during the inflationary spiral of the 1970s when rates soared and bonds (and bond funds) sank. I suppose that is her justification. She says that the safe part of your portfolio should not be exposed to that. She thinks of bonds as CDs, where you have full control of each individual instrument and are assured of getting your original investment and stated interest back.

She never talked about the Trinity Study or Firecalc or I-orp or any other common retirement planning tool based on Monte Carlo analysis that I can remember, I think because they all assumed a bond fund component.
HenrySouthernCal
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Re: Is individual Bonds better than Bond Fund?

Post by HenrySouthernCal »

I never buy any bond individual bond, only buy bond funds. To me individual bond is too illiquid , with 2-3% annual yield, the bid-ask spread eats too much of the income if in case you need to sell for some unplanned reason. Bond fund is very liquid and is laddered and very well diversified portfolio. I don't have the vast amount of money, time and skills to build my own bond portfolio to match those Vanguard bond funds. I can select vanguard bond fund to meet my needs.
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Doc
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Re: Is individual Bonds better than Bond Fund?

Post by Doc »

HenrySouthernCal wrote: Thu Jun 21, 2018 12:02 am I never buy any bond individual bond, only buy bond funds. To me individual bond is too illiquid , with 2-3% annual yield, the bid-ask spread eats too much of the income if in case you need to sell for some unplanned reason. Bond fund is very liquid and is laddered and very well diversified portfolio. I don't have the vast amount of money, time and skills to build my own bond portfolio to match those Vanguard bond funds. I can select vanguard bond fund to meet my needs.
It depends what you are buying. Treasury obligations are very liquid. As an example for a ~2yr Treasury US Treasury Bds 2.25% 03/31/2020
The bid/ask (qty 10) is 99.508/99.526 for price and 2.535/2.524 for YTM. That's less than the e/r for most funds.

Now if you are talking muni's or corporates that's a different storey.
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hudson
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Re: Is individual Bonds better than Bond Fund?

Post by hudson »

I only own bond funds and will likely continue that way.
I think Larry Swedroe said that you should have at least 500K to go into individual bonds. He also said that one should stick with AAA/AA individual bonds.
My federal tax rate is 22% and my state tax rate is 5.75%. Therefore buying individual NC Munis would save me 27.75% on taxes. The downside is the learning curve. At some point, I may start learning. For now Vang Intermediate Muni (VWIUX) is OK. I keep looking at Baird's intermediate muni (BMBIX), but the expenses are a disadvantage.
Last edited by hudson on Fri Jun 22, 2018 12:40 pm, edited 1 time in total.
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Doc
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Re: Is individual Bonds better than Bond Fund?

Post by Doc »

hudson wrote: Thu Jun 21, 2018 11:48 am I think Larry Swedroe said that you should have at least 500K to go into individual bonds. He also said that one should stick with AAA/AA individual bonds.
The issue of investing small amounts is an important one when it comes to municipal and corporate bonds. The reason is that larger blocks receive better pricing. (p 189)
...
The conclusion we can draw us that if an investor limits herself to bonds of the highest quality and has a portfolio of perhaps $500,000 she should consider building her own portfolio, saving the cost of the mutual fund. (p192)
...
It is essential for investors to keep in mind that with Treasury bonds, where pricing is transparent, and you can deal directly with the Treasury, the trading cost of tax-loss harvesting would be low. (p193)
"The Only Guide to a Winning Bond Strategy You'll ever Need", by Larry E. Swedroe & Joseph Hempen 1st Edition 2006
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
pascalwager
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Re: Is individual Bonds better than Bond Fund?

Post by pascalwager »

VaR wrote: Wed Jun 20, 2018 10:50 pm
pascalwager wrote: Wed Jun 20, 2018 10:21 pm Bond funds, in the interest of convenience, encourage the investor to ignore premature redemptions and lost principle during rising rates. Individual bonds avoid this problem if the investor waits for his bonds to mature rather than selling early.

The individual investor needs to decide which is more important-–convenience or return of principle.
I don't understand what you mean. Would you please expand on this?
Yes, for example, look at the Vanguard Short-Term Bond Index Fund price history chart set at a one-year period. Would you want to be a retiree taking regular redemptions from STB while the price is steadily dropping? If instead you were waiting for individual bonds to mature, then you wouldn't be experiencing this probable loss of principle.

Discipline (waiting for maturity) is obviously required to get your money back from individual bonds in a rising rate market whereas bond fund holders in the same market seem to assume that they can efficiently sell shares thoughtlessly at any time. Isn't this disparity strange and suggestive that the two outcomes are unequal?

Now, it's possible that you would be forced to sell an individual bond early for critical living expenses, say for food or rent. That's a different matter, but at least you have the choice of not selling early for deferrable or non-critical expenses.
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Re: Is individual Bonds better than Bond Fund?

Post by hudson »

Doc wrote: Thu Jun 21, 2018 12:14 pm
hudson wrote: Thu Jun 21, 2018 11:48 am I think Larry Swedroe said that you should have at least 500K to go into individual bonds. He also said that one should stick with AAA/AA individual bonds.
The issue of investing small amounts is an important one when it comes to municipal and corporate bonds. The reason is that larger blocks receive better pricing. (p 189)
...
The conclusion we can draw us that if an investor limits herself to bonds of the highest quality and has a portfolio of perhaps $500,000 she should consider building her own portfolio, saving the cost of the mutual fund. (p192)
...
It is essential for investors to keep in mind that with Treasury bonds, where pricing is transparent, and you can deal directly with the Treasury, the trading cost of tax-loss harvesting would be low. (p193)
"The Only Guide to a Winning Bond Strategy You'll ever Need", by Larry E. Swedroe & Joseph Hempen 1st Edition 2006
Thanks Doc!
bondsr4me
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Re: Is individual Bonds better than Bond Fund?

Post by bondsr4me »

This article was recently in the Summer 2018 edition of OnlineInvesting that is publish by Charles Schwab.
I just wanted to share it with others who may still have questions about the subject line.

It is a pretty simple, easy-to-understand article.
I am not taking a position one way or the other because as with any aspect of investing, it depends on a person's situation.

Here is the link:

https://www.schwab.com/resource-center/ ... bond-funds

Have a great day,

Don
Lakers3
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Re: Is individual Bonds better than Bond Fund?

Post by Lakers3 »

dbr wrote: Mon Jun 18, 2018 9:25 am For the purpose of maintaining a portfolio for retirement withdrawals there is no advantage to holding individual bonds rather than a fund except in people's heads.

One should read here: https://www.bogleheads.org/wiki/Individ ... _bond_fund
I have been trying to answer that question. What you’re saying is if you are withdrawing the interest only at retirement and not the principal then NAV fluctuation from interest rate changes is irrelevant?
staustin
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Re: Is individual Bonds better than Bond Fund?

Post by staustin »

William Berstein, who I admire a great deal, suggested that individual investors own treasuries directly given that they are readily available and require no underwriting. He suggested bond portions of portfolios be in mostly (if not all) risk free assets. To the extent an investor was interested in corporate bonds / municipals, they should use funds given that it would be very time consuming and difficult for an individual investor to build a diversified portfolio. I've generally followed this advice.
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Re: Is individual Bonds better than Bond Fund?

Post by Chaconne »

I saw the same PBS Suze show that the OP did. My ears perked up when she said that because about two days before that, I put a boatload of money into the Vanguard Total Bond Fund! (The I remembered that I probably trust Taylor Larimore more than Suze.)

BUT...I was surprised just a few days after that to pick up the latest issue of AARP Magazine, with an entire Suze-centric section on retirement finance, and I could swear she recommended bond FUNDS. I wish I could double-check it, but I don't have the issue anymore.

-Bob
champion_ham
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Re: Is individual Bonds better than Bond Fund?

Post by champion_ham »

Did you see what happened to Tesla bonds yesterday?
Kevin8696
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Re: Is individual Bonds better than Bond Fund?

Post by Kevin8696 »

Here's a Vanguard whitepaper from a year ago on the topic of Bonds vs Bond Funds.

https://personal.vanguard.com/pdf/ICRIBI.pdf

A few things to consider:

1. Diversification: Bond funds are much more diversified than individual bonds. Ask the old GM bondholders...
2. Liquidity: Can be tough to sell small holdings.
3. Bid-Ask spread: Can't get as good a price buying one-off's compared to the buying power of a bond fund.
4. Transaction costs: Gotta pay that broker for the trade.
5. Management Fees: Are you paying someone an AUM fee to pick and manage the bond portfolio ?
6. Cash Drag: Very difficult to reinvest the interest and principal payments you receive on individual bonds.

At the end of the day, the bond funds usually win out, unless you have a future cash need that is tied to a very specific maturity date.
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Re: Is individual Bonds better than Bond Fund?

Post by Spirit Rider »

I happen to like individual bonds subject to some substantial restraints. Some significant individual bond risks and my mitigation strategies:
  1. Credit risk: Only buy treasury securities
  2. Interest risk: Inflation indexed bonds
  3. Reinvestment risk: Zero coupon, T-Bills and Savings Bonds
  4. Call risk: Only buy non-callable bonds
  5. Tax risk: state tax free in taxable, OID taxable in tax-advantaged accounts
I use bond index funds except for; 3/6-month T-Bills (1,2,3,4,5) I-Bonds (1,2,3,4, 5), TIPS in IRAs (1, 2, 4, 5).

I think any of the risks in the link @Kevein8698 provided can be mitigated by only buying I Bonds from Treasury Direct and Treasury marketable securities at auction. No individual corporate or municipal bonds for me.
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Doc
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Re: Is individual Bonds better than Bond Fund?

Post by Doc »

Spirit Rider wrote: Sat Sep 08, 2018 11:01 am I think any of the risks in the link @Kevein8698 provided can be mitigated by only buying I Bonds from Treasury Direct and Treasury marketable securities at auction. No individual corporate or municipal bonds for me.
Even Vanguard agrees

From the article:
Mutual funds have little or no advantage over a Treasury bond ladder in terms of diversification so long as the portfolio’s value is sufficient to permit complete diversification across maturities in the ladder’s term.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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peterinjapan
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Re: Is individual Bonds better than Bond Fund?

Post by peterinjapan »

One thing I know about Bogleheads in general is that they can be VERY against individual bonds. It makes sense -- if you hold 5-8 different bonds, that's a lot of risk. OTOH, my advisor at Fidelity recommends holding some bonds individually, as long as they're investment grade. So I don't know which way to go, and have my bonds in an active fund, GIBLX, which he recommended. (Active being potentially better for bonds than passive.)

Does anyone have any feedback for me?
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patrick013
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Re: Is individual Bonds better than Bond Fund?

Post by patrick013 »

I can change some of my bond AA to long from short term
or from short term to long term to take advantage of
changes in the secular trend in interest rates. Otherwise
a bond fund has the diversification benefit when investing
in muni's or corp bonds which should in an investment graded
bond fund anyway.

With AAA bonds safety is expected. I might buy individual
bonds like that just for some short term diversification.

TRSY, Agency, and CD's are considered safest and intermediate
and even longer terms are popular especially after rates have
risen. VG expenses are quite low so bond funds are also
popular then. As rates continue to rise slowly the CD ladders
are useful to the investors that have them.
age in bonds, buy-and-hold, 10 year business cycle
rgs92
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Re: Is individual Bonds better than Bond Fund?

Post by rgs92 »

I like either CDs or bond funds, not single bonds.
Bonds are for safety + low-volatility, therefore you need diversification in your bond portfolio, so a fund is better for this.
I even worry about individual municipals somewhat, but that's another subject.

Suze Orman hates bond funds because they can go up and down, but as Taylor and Mr. Bogle point out, this volatility is historically very low, so it's not a problem. (This means total bond market funds of course).

Suze has made a big deal about hating bond funds for 20 years, but the only individual bonds she seems to recommend are municipals, which is great if you are you have 10 million dollars in taxable investments and your problem is minimizing taxes, and that I think is her perspective.

I don't think I ever heard Suze mention the kind of individual bonds she would use in an IRA. (Like short term treasuries? What good is that?)
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patrick013
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Re: Is individual Bonds better than Bond Fund?

Post by patrick013 »

rgs92 wrote: Sat Sep 08, 2018 12:14 pm I don't think I ever heard Suze mention the kind of individual bonds she would use in an IRA. (Like short term treasuries? What good is that?)
Zero-coupon bonds. May yield higher than coupon bonds. Plus
you could target date withdrawals if needed to do so. So some
recommend zero's.
age in bonds, buy-and-hold, 10 year business cycle
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Doc
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Re: Is individual Bonds better than Bond Fund?

Post by Doc »

peterinjapan wrote: Sat Sep 08, 2018 11:57 am One thing I know about Bogleheads in general is that they can be VERY against individual bonds. It makes sense -- if you hold 5-8 different bonds, that's a lot of risk. OTOH, my advisor at Fidelity recommends holding some bonds individually, as long as they're investment grade. So I don't know which way to go, and have my bonds in an active fund, GIBLX, which he recommended. (Active being potentially better for bonds than passive.)

Does anyone have any feedback for me?
I agree that "active being potentially better for bonds than passive" in some cases but the Guggenheim Total Return Bond Fund Class P GIBLX is not one of those cases. It's not investment grade, it has a high expense ratio and little management experience.

"This offering has posted strong returns and modest volatility since its 2011 inception. The fund also boasts a novel process and large investment staff. It takes on significantly more risk than most peers in the intermediate-term bond Morningstar Category, though, and the tenure of its fixed-income team is relatively modest in industry experience and time with the firm."

https://analysisreport.morningstar.com/ ... en-US&cur=
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
hudson
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Re: Is individual Bonds better than Bond Fund?

Post by hudson »

peterinjapan wrote: Sat Sep 08, 2018 11:57 am One thing I know about Bogleheads in general is that they can be VERY against individual bonds. It makes sense -- if you hold 5-8 different bonds, that's a lot of risk. OTOH, my advisor at Fidelity recommends holding some bonds individually, as long as they're investment grade. So I don't know which way to go, and have my bonds in an active fund, GIBLX, which he recommended. (Active being potentially better for bonds than passive.)

Does anyone have any feedback for me?
GIBLX or Guggenheim Total Return Bond P has an expense ratio of .83 compared to Vanguard Total Bond Admiral's expense ratio of .05.
That's $850 per year on a 100K investment in GIBLX; that's only $50 per year with a 100K investment in Vang. Total Bond Adm. If I owned GIBLX, I would jump ship.
Kevin8696
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Re: Is individual Bonds better than Bond Fund?

Post by Kevin8696 »

Doc wrote: Sat Sep 08, 2018 11:09 am
Spirit Rider wrote: Sat Sep 08, 2018 11:01 am I think any of the risks in the link @Kevein8698 provided can be mitigated by only buying I Bonds from Treasury Direct and Treasury marketable securities at auction. No individual corporate or municipal bonds for me.
Even Vanguard agrees

From the article:
Mutual funds have little or no advantage over a Treasury bond ladder in terms of diversification so long as the portfolio’s value is sufficient to permit complete diversification across maturities in the ladder’s term.
From the Vanguard article:

"Diversification
In fixed income investing, diversification among issuers, credit qualities, and term structures is a primary consideration for municipal and corporate bonds, but less critical for mortgage-backed securities and U.S. Treasury securities."

To be clear, my point on diversification related primarily to diversifying the credit risk of issuers, not to portfolio diversification across maturities.
VaR
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Re: Is individual Bonds better than Bond Fund?

Post by VaR »

peterinjapan wrote: Sat Sep 08, 2018 11:57 am One thing I know about Bogleheads in general is that they can be VERY against individual bonds. It makes sense -- if you hold 5-8 different bonds, that's a lot of risk. OTOH, my advisor at Fidelity recommends holding some bonds individually, as long as they're investment grade. So I don't know which way to go, and have my bonds in an active fund, GIBLX, which he recommended. (Active being potentially better for bonds than passive.)

Does anyone have any feedback for me?
Why does your advisor recommend holding some bonds individually?

I'd say that bogleheads are indifferent to holding individual bonds, except in the case of bonds with credit risk, where there is general agreement that adequate diversification of the credit risk requires holding too many bonds for it to be practical for an individual investor.

Why does your advisor recommend active bond funds, and GIBLX in particular?
Kevin8696
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Re: Is individual Bonds better than Bond Fund?

Post by Kevin8696 »

VaR wrote: Sun Sep 09, 2018 12:26 pm
peterinjapan wrote: Sat Sep 08, 2018 11:57 am One thing I know about Bogleheads in general is that they can be VERY against individual bonds. It makes sense -- if you hold 5-8 different bonds, that's a lot of risk. OTOH, my advisor at Fidelity recommends holding some bonds individually, as long as they're investment grade. So I don't know which way to go, and have my bonds in an active fund, GIBLX, which he recommended. (Active being potentially better for bonds than passive.)

Does anyone have any feedback for me?
Why does your advisor recommend holding some bonds individually?

I'd say that bogleheads are indifferent to holding individual bonds, except in the case of bonds with credit risk, where there is general agreement that adequate diversification of the credit risk requires holding too many bonds for it to be practical for an individual investor.

Why does your advisor recommend active bond funds, and GIBLX in particular?
Maybe it's the 12b-1 fee of 0.25% in GIBLX that prompts the recommendation ? Is the advisor compensated by the fund ?

Btw, the average credit quality of this fund's portfolio is rated "BB". Anything below BBB are considered junk bonds.
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