Individual Bonds vs Bond Funds

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Sammy123
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Individual Bonds vs Bond Funds

Post by Sammy123 »

We are recently retired and are living off of a portfolio of Vanguard stock and bond ETFs. A few different friends of mine recommended that I go out and purchase some individual bonds. I want to stay with the core 4 (or lazy portfolio) strategy of having only 4 investments (VTI, VXUS, BND, BNDX). Can I just use BND and BNDX as the bond part of my portfolio or should I go purchase some individual bonds? On a higher level, can someone explain what is better between individual bonds vs bond funds.
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mhc
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Re: Individual Bonds vs Bond Funds

Post by mhc »

When your friends said you should buy individual bonds, did they give you a reason why? If so, what are the reasons?

Why do you have bond funds?

Which do you think you should hold?

What types of accounts are your bonds currently in?
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Optimistic
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Re: Individual Bonds vs Bond Funds

Post by Optimistic »

This is a topic covered in the Wiki. I suggest you start there.
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Sammy123
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Re: Individual Bonds vs Bond Funds

Post by Sammy123 »

mhc wrote: Wed Sep 21, 2022 2:50 pm When your friends said you should buy individual bonds, did they give you a reason why? If so, what are the reasons?
- His investment advisor recommended individual bonds as part of his 60:40 stock:bond portfolio.

Why do you have bond funds?
- Simplicity. I'm aiming for Core 4 (VTI, VTXUS, BND, BNDX).

Which do you think you should hold?
- I don't know. That's why I asked Bogleheads. There are gigabytes of data showing that it's better to own stock funds than to own individual stocks (and yes, there are exceptions to every rule). But when you ask about bond funds vs individual bonds, the answer is seems to be not so simple.

What types of accounts are your bonds currently in?
- I'm aiming to consolidate all present investments into Core 4 (VTI, VTXUS, BND, BNDX). The bond funds BND and BNDX will be in IRA accounts; the stock funds in taxable and IRA account.
Parkinglotracer
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Re: Individual Bonds vs Bond Funds

Post by Parkinglotracer »

If you know when you will need your money (like 20K a year) from your bond funds then having a ladder of individual bonds maturing each year for that amount will isolate you from having to sell part of a rolling bond etf / fund while it is down from interest rates increasing. On the other hand if you are just going to keep rolling over your bonds to longer term bonds as they mature for the next 20 years you will be basically doing the same as the total bond fund.

I like having individual treasury bonds in 1, 2, 3, yr maturities where they fluctuate in value on my statement but I know when they mature they will be worth original face value. It is a bit more complicated and I add the risk rates will be lower when I have to reinvest but it works for me.

For my fixed income I do mm fund, stable value fund in tsp, I bonds each year, treasury ladder, and brokered CDs.
Last edited by Parkinglotracer on Wed Sep 21, 2022 5:08 pm, edited 1 time in total.
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Sammy123
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Re: Individual Bonds vs Bond Funds

Post by Sammy123 »

Optimistic wrote: Wed Sep 21, 2022 3:00 pm This is a topic covered in the Wiki. I suggest you start there.
Thank you very much. I summarize that detailed thread as follows:

- Large investors with time and knowledge to research - Individual bonds may be the best choice.

- Smaller investors who lack time or knowledge to research - Bond funds may be better (particularly bond index funds like BND).

Would you agree or have I over simplified?

Might a smaller investor be a person who is planning only his retirement with his wife and has a few million (say 4 million) to invest in Core 4 (VTI, VXUS, BND, BNDX)? Would such an investor be better served by buying just BND and BNDX than individual bonds?
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Re: Individual Bonds vs Bond Funds

Post by Parkinglotracer »

This is a good year to understand why a rolling bond fund or etf like BND performs like it does.

In a year when interest rates go down bonds go up in value so it masks the problem with owning a fund with a 7 or 8 year duration

In a year rates go up the change in net asset value makes one understand I need to stay in the etf at the higher yield to get my original investment back.

Always good to have a basic understanding of duration, change in NAV, and the relationship with interest rates.

Of course this is an extreme year.
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Re: Individual Bonds vs Bond Funds

Post by Parkinglotracer »

Buying an individual treasury bond thru vanguard is an easy task.
dbr
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Re: Individual Bonds vs Bond Funds

Post by dbr »

Sammy123 wrote: Wed Sep 21, 2022 5:02 pm
Might a smaller investor be a person who is planning only his retirement with his wife and has a few million (say 4 million) to invest in Core 4 (VTI, VXUS, BND, BNDX)? Would such an investor be better served by buying just BND and BNDX than individual bonds?
That investor is perfectly well off with bond funds and the idea that he "ought" to buy individual bonds is baloney. That said there is nothing wrong with buying your own Treasuries, TIPS, or I bonds if you want. The chances of making bad choices and taking losses on markups and trading are very small. By the same token the investor you describe does not have any real upside for holding individual bonds. Some people like the idea of a bond ladder for supplying known income for a period of time in retirement to be helpful, but I would not say that rises to something people "ought" to do.
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vineviz
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Re: Individual Bonds vs Bond Funds

Post by vineviz »

Sammy123 wrote: Wed Sep 21, 2022 5:02 pm
Optimistic wrote: Wed Sep 21, 2022 3:00 pm This is a topic covered in the Wiki. I suggest you start there.
Thank you very much. I summarize that detailed thread as follows:

- Large investors with time and knowledge to research - Individual bonds may be the best choice.

- Smaller investors who lack time or knowledge to research - Bond funds may be better (particularly bond index funds like BND).

Would you agree or have I over simplified?

Might a smaller investor be a person who is planning only his retirement with his wife and has a few million (say 4 million) to invest in Core 4 (VTI, VXUS, BND, BNDX)? Would such an investor be better served by buying just BND and BNDX than individual bonds?
I don't think being a "large" or "small" investors has a whole lot to do with the decision. The only time that being a "large" investor would be helpful would be a situation where you intend to build a ladder of individual corporate or municipal bonds, where you'd want to diversify the credit/default risk, and therefore need a large account in order to get a decent amount of each different bond.

With US government bonds, like TIPS or Treasuries, portfolio size is not much of a factor.

I'd say the main advantage of setting up a ladder of individual bonds is that, once it is constructed, you don't have to make any decisions about it. You can just spend the regular income it generates, via coupon payments and maturing bonds, for whatever period the ladder covers. This can be helpful for people who just prefer that self-liquidating feature, for people who don't want to spend any time managing their portfolio, for people whose retirement portfolio is maybe just barely enough to cover their expenses, and some other cases. A ladder of individual bonds will provide a "floor" of predictable income that will arrive no matter what happens to stock and bond markets.

If you don't value, or need, that predictability then there is nothing at all wrong with just using bond funds.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
dbr
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Re: Individual Bonds vs Bond Funds

Post by dbr »

vineviz wrote: Wed Sep 21, 2022 5:25 pm
Sammy123 wrote: Wed Sep 21, 2022 5:02 pm
Optimistic wrote: Wed Sep 21, 2022 3:00 pm This is a topic covered in the Wiki. I suggest you start there.
Thank you very much. I summarize that detailed thread as follows:

- Large investors with time and knowledge to research - Individual bonds may be the best choice.

- Smaller investors who lack time or knowledge to research - Bond funds may be better (particularly bond index funds like BND).

Would you agree or have I over simplified?

Might a smaller investor be a person who is planning only his retirement with his wife and has a few million (say 4 million) to invest in Core 4 (VTI, VXUS, BND, BNDX)? Would such an investor be better served by buying just BND and BNDX than individual bonds?
I don't think being a "large" or "small" investors has a whole lot to do with the decision. The only time that being a "large" investor would be helpful would be a situation where you intend to build a ladder of individual corporate or municipal bonds, where you'd want to diversify the credit/default risk, and therefore need a large account in order to get a decent amount of each different bond.

With US government bonds, like TIPS or Treasuries, portfolio size is not much of a factor.

I'd say the main advantage of setting up a ladder of individual bonds is that, once it is constructed, you don't have to make any decisions about it. You can just spend the regular income it generates, via coupon payments and maturing bonds, for whatever period the ladder covers. This can be helpful for people who just prefer that self-liquidating feature, for people who don't want to spend any time managing their portfolio, for people whose retirement portfolio is maybe just barely enough to cover their expenses, and some other cases. A ladder of individual bonds will provide a "floor" of predictable income that will arrive no matter what happens to stock and bond markets.

If you don't value, or need, that predictability then there is nothing at all wrong with just using bond funds.
Exactly so.

Perhaps one counter to the advantage of using ladders for a hands off income is that people maintaining a rebalanced portfolio at a target asset allocation might find it simpler to rebalance across stock and bond funds than to manage that with individual bonds. A bond ladder in particular has the benefits it does partly because you don't mess with it. But, it is all fine.
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mhc
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Re: Individual Bonds vs Bond Funds

Post by mhc »

Since you desire simplicity, I would recommend staying with the bond fund. Simplicity is especially important as one ages and only one spouse has interest in investing.

Sticking with a 3 or 4 fund portfolio has a lot of merits.
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Sammy123
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Re: Individual Bonds vs Bond Funds

Post by Sammy123 »

Thank you all for the excellent replies. You are all great!
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