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Are individual bonds of great companies, i.e. Toyota, Chevron, AT&T a safer place to keep your investment versus, Dreyfus Bond Index, Vanguard total Bd ETF, I shares core total US Bond Market. My bond account lost over 5% May 21 - June 30.

Retired - taking 5-6% income stream and drawing SSecurity 58% in Income, that includes about 10% in Hi yield corporate bond funds. Stock exposure 30% Cash 8%.

Aug 14, 2013 by larry from San Diego, CA in  |  Flag
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A.J. Blackstone Level 14


Short answer: Yes. It all has to with CONTROL. In bond mutual funds and EFT's you are investing with fund managers that you cannot control. Also, you have no control of the public investors cash inflow and outflows within the funds (when the public puts money in or takes it out). You have no control of when bonds are bought and sold, AND sometime the managers cannot control this either.

Bond Funds Explained: Larry here is what happens. Bond fund manager manages a fund made up of 100% bonds. Interest rates are low, but start to move up. As interest rate raise it lowers the market value of bonds. The public sees their investment in the bond fund go down, so in turn they pull their money from the fund. The fund manager needs to pay out the public in cash, and in order to do that they have to sell bonds…most likely for a loss, and in turn have given up the interest payments of the sold bonds. This vicious cycle continues, and bond fund holders loose out. It is not the fund manager’s fault, but he/she had to sell at the wrong time because the public wanted their money.

If your goal is INCOME and you do not plan on selling the bonds before maturity, investing in a couple financially strong companies, like the ones you listed, is no more risky than investing in a bond fund. Disclosure: I would work with a professional that understands the bond market if you do not. There would be very little risk if you invested in bonds and held them until maturity. This is because when you by a bond for only an income propose it does not matter what the market price of the bond is, it only matters that you are getting paid the income the bond provides. Example: You invested in bonds and they are paying you semiannual income of $10,000. The next day interest rates skyrocket, and your bonds lose 90% of their value. WHO CARES. Six months from now you will be receiving income of $10,000. It do not matter what the market does. Your rate is fixed.

VERY IMPORTANT: This should be money that you do not need in case of emergencies. If you invest the emergency money, the bond market tanks, you have an emergency and need the money; you will lose a lot of money. Also, watch out for duration. Too much duration can increase you chance of failure.

It all lies with the control, Larry. If you are working with the correct investment advisor you do not need the “bond fund” to stay safe.

Comment   |  Flag   |  Aug 15, 2013 from Tampa, FL

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Rich Winer Level 20

Larry, individual bonds are not necessarily safer than bond funds, just different. When interest rates rise, the value of individual bonds and bond funds will both decline. When interest rates decline, both with increase in value.

If you want or need a guaranteed rate of return and know what to look for when buying individual bonds, then doing so may be the way to go. However, if interest rates rise, the value of your individual bonds will still decline. When you buy an individual bond, you are guaranteed to receive a specific rate of interest. With a bond fund, you are not guaranteed a rate of interest because the portfolio will change over time as older bonds expire, bonds are sold and new ones are purchased. In a good bond fund, you get professional management and greater diversification, which is why I generally prefer investing in bonds through bond funds.

All of the bond funds or ETFs you mentioned are passive index funds. Although you would pay more in fees, I prefer actively managed bond funds, and invest in ones that have historically outperformed their benchmarks net of fees.

The losses you incurred in your bond funds were caused by a sudden spike in interest rates and fears that interest rates will continue to rise if the Fed tapers its bond buying program. If rates continue to rise, individual bonds and bond funds will both have problems. To address this concern in my mutual fund portfolios, I have reduced my bond exposure and evenly weighted bond funds that employ strategies I believe will do well in a rising rate environment, including flexible bond funds, long/short bond funds, floating rate funds and high yield. Of course there's no guarantee that I will be right. I also like the Principal Global Diversified Income Fund, although I am not currently using it. I hope this helps.

Comment   |  Flag   |  Aug 14, 2013 from Woodland Hills, CA

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Alex Bentley Level 18

I wouldn't say they are safer. Stepping back and looking at the big picture, a bond portfolio should be diversified by credit quality and maturity. You should have bonds of varying credit quality and different maturities. My idea of a well diversified bond portfolio would be 50% in Vanguard Total Bond Market Fund and 50% in the Vanguard Total International Bond Market Fund. That gives you international diversification as well and mirrors the total global universe of bonds. Trying to game the bond market by only owning corporate bonds, or only mortgages, or high yield corporate is not going to work. It is also pretty much impossible to duplicate that diversification with individual bonds, as well as expensive. That being said, bonds in general lose value when interest rates go up. That is just the way it is. But bonds are an important part of a diversified portfolio and a great hedge against a stock bear market. The funds you listed seem to duplicate each other and I wonder why you need all three. You also don't seem to have any international exposure.

Comment   |  Flag   |  Aug 14, 2013 from Pacific Palisades, CA

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Larry, I would add that you may want to consider staying away from bonds with a longer time to maturity. The longer the bond duration (or in terms of a bond fund, the longer average maturity of the fund) the more interest rate sensitive they are, which translates to a higher risk and potential loss you may incur. You may want to consider only owning bonds with average maturity of 5 years or less. Longer than that, and you are generally not being compensated for the extra risk you take, and may as well have invested in higher risk/reward stocks instead.

Comment   |  Flag   |  Aug 15, 2013 from Malvern, PA

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Larry, first you mention three ‘great’ companies. In my vocabulary, there is no such thing as ‘great’. All three companies you mentioned have had dark days in the past. With that said, I agree they are all good companies.

The bond funds you mentioned, other than a little variance in duration, they are very similar; you have no corporate exposure, nor any international exposure. Interesting, as you mentioned some high grade corporate issues. And I see you have some high yield. But I think you could be more diversified.

I agree with Larry’s point in that I too, prefer actively managed funds. And his comment that your losses are due to rising interest rates and fears of rising interests rates. I often use third party institutional money managers that have various strategies. One strategy is to trade bonds based on which type of bonds have the most favorable credit spread.

I recommend you seek advice from a local financial planner, preferably a CFP® to come up with a financial plan that will keep you well diversified within the universe of bonds as well as the rest of your portfolio, and that will meet your goals, risk tolerance and objectives. Bonds may appear to be a simple straightforward investment, but in certain economic times, and I believe now is one of them, they can be, depending on your goals and time horizon, very risky

Comment   |  Flag   |  Aug 16, 2013 from Delray Beach, FL

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