How do you buy bonds?

[corn18]

My understanding of bond funds is that although their NAV will dip as interest rates rise, the yields of those bonds will increase as new bonds replace the old. Thus, if you have sufficient time to allow for these changes to take effect (which is how the average duration comes into play), the net effect is minimal, while maintaining the asset risk protection inherent in bonds. So long term investors can do just fine with bond funds.

Caveat: That's merely my understanding. Take it for what it's worth (not all that much)

This is all correct. Add to this the safety of rebalancing when the market goes up or down a lot, and a balanced 60/40 low cost indexed portfolio lets me sleep soundly at night.

[~bs]

My understanding of bond funds is that although their NAV will dip as interest rates rise, the yields of those bonds will increase as new bonds replace the old. Thus, if you have sufficient time to allow for these changes to take effect (which is how the average duration comes into play), the net effect is minimal, while maintaining the asset risk protection inherent in bonds. So long term investors can do just fine with bond funds.

Caveat: That's merely my understanding. Take it for what it's worth (not all that much)

correct. As long as the fund manager allows those lower interest bonds to mature, and not sell them at a discount, it will all average out over time with the newer higher interest rate bonds.

[~bs]

Have you looked into buying a TIPS ladder? That might be a good alternative. I have heard a lot about them, but don't know much.

This site seems to have many words that I don't quite follow, but it does walk through the benefits and risks in detail.

https://retirementresearcher.com/how...rement-income/

There's a bond fund for that too.

Vanguard Inflation-Protected Secs Inv (VIPSX)

[clatoden99]

To be able to buy bonds, you first need to open a self-directed investment account. Most banks have those. You will need to sign multiple forms and disclaimers to do so, but it least it only needs to be done once. In order to choose which bonds to buy, it can be quite complex, but here are some high-level comments:

Buy only from safe, financially sound companies/countries. Avoid bonds from countries that don’t mind defaulting on their debt once in a while, such as Argentina, Venezuela, ..
You can make profits selling your bonds when interest rates go down. Similarly, the value of your bonds will go down when interest rates go up (inverse relationship)
If you intend to keep a bond until maturity, try to get one with good Yield To Maturity (YTM).

[disneysteve]

To be able to buy bonds, you first need to open a self-directed investment account. Most banks have those. You will need to sign multiple forms and disclaimers to do so

I can buy bonds in my Scottrade discount brokerage account. It wasn't hard to open at all.

[Jluke]

I can buy bonds in my Scottrade discount brokerage account. It wasn't hard to open at all.

why the interest in bonds? [pun intended]

do you know something (inside info)?

[disneysteve]

why the interest in bonds? [pun intended]

do you know something (inside info)?

I've heard for years that individual bonds are better than bond funds because they give you control over rates and maturities. Early on, when we only had a small amount invested, a fund made more sense for sure. Now that our portfolio is more substantial, I'm wondering if it makes sense to switch or if we should just keep doing what we're doing.

Retirement is still a ways off so I'm not yet concerned about generating current income. I guess it's more future planning at this stage.

[kv968]

I've heard for years that individual bonds are better than bond funds because they give you control over rates and maturities.

You would have more control over rates and maturities since you would be choosing them but you wouldn't also be able to constantly roll them over to take advantage of the newer rates (assuming rates are going up). You could buy a bond ladder, but doing so while being properly diversified could require a substantial amount of money to do so. Bonds aren't as liquid at stocks by a long shot and the bid/ask spread could eat up any difference in yield you would get from just holding a bond fund. The more you money you invest in a bond, the better asking price you will get, which would up your yield, but again you'd be needing to allocate more money in order to do that.

If you're looking for more of a "steady" stream of income you might want to take a look at: Guggenheim BulletShares

These are corporate bond ETF's that have a specific maturity date and hold hundreds of issues so you have diversification. And for all intents and purposes, they would act as holding a bond with that specific maturity date.

[~bs]

I've heard for years that individual bonds are better than bond funds because they give you control over rates and maturities. Early on, when we only had a small amount invested, a fund made more sense for sure. Now that our portfolio is more substantial, I'm wondering if it makes sense to switch or if we should just keep doing what we're doing.

Retirement is still a ways off so I'm not yet concerned about generating current income. I guess it's more future planning at this stage.

maybe not a perfect comparison. but picking bonds is like picking your own stocks. there's advantages to doing it, and there's advantages to buying mutual funds instead.

In my opinion, if your funds are substantial, it makes even more sense to go with the diversified bond fund instead of picking individually because you have more to lose. I'd say the same for stocks.

Like was mentioned in many threads, it doesn't have to be an all or nothing thing. Liquidate 10% of your bond funds, then invest in them directly to see if its something you prefer.

I used to invest heavily in individual stocks and bonds when I was younger. But then I realized that I'm not a great stock/bond picker able to generate returns consistently higher than the market at similar or lower risk than the market. It's pointless unless you're going to invest the time/effort to be better than the market.

[disneysteve]

Thanks, everyone. It sounds like bond funds are the way to go for various reasons. It also sounds like there are many more options in bond funds if, for some reason, someone wants to focus on a particular area/sector/maturity/whatever. Our current investment is mainly in a total bond market index. I think I'll stick with that.

[corn18]

The other good thing about owning bond funds vs. bonds is the ability to rebalance your asset allocation very easily and also tax loss harvest.

Let's say that stocks go up 20% and your AA gets out of whack by 10%. You can sell stock funds at a high price and buy bond funds at a low price to rebalance to your target AA. And vice versa. Couldn't do that as easily with individual bonds.

Let's say that interest rates go up and your bonds are not the best for your situation. You're stuck. If interest rates go up and your bond fund drops in price, you might be able to sell the funds, take the loss and then re-buy immediately into another bond fund. Have to watch out for wash sales, but this is a tool many Bogleheads use very effectively.

[~bs]

The other good thing about owning bond funds vs. bonds is the ability to rebalance your asset allocation very easily and also tax loss harvest.

Let's say that stocks go up 20% and your AA gets out of whack by 10%. You can sell stock funds at a high price and buy bond funds at a low price to rebalance to your target AA. And vice versa. Couldn't do that as easily with individual bonds.

Let's say that interest rates go up and your bonds are not the best for your situation. You're stuck. If interest rates go up and your bond fund drops in price, you might be able to sell the funds, take the loss and then re-buy immediately into another bond fund. Have to watch out for wash sales, but this is a tool many Bogleheads use very effectively.

This year I've been divesting out of P2P lending, which are generally 3 to 5 year notes. So basically I've been listing notes at a slight discount and slowly been selling them off. The ones I can't sell, I basically need to wait until the loans are paid off over time otherwise I'll take a bigger hit by selling at a discount.

Similar situation in that when you hold loans (like bonds), it's not as easy or quick or cost effective to divest out if you need to.

[txex86]

I like individual municipal bonds. The tax advantages are really helpful.

[disneysteve]

I like individual municipal bonds. The tax advantages are really helpful.

But there are also muni bond funds. Do those have the same tax benefits?

[txex86]

But there are also muni bond funds. Do those have the same tax benefits?

It is my understanding that in municipal bond funds, often the tax exemption is unoptimized for an individual investor. In other cases, the state tax exemption may only apply to those holdings originating from the state(s) in which you pay tax. So if you live in New York and buy a municipal fund that’s over-indexed on California, you’re not making the most of your investment.

In other municipal bond funds, sometimes the tax exemption isn’t even passed through to you at all: it may be withheld and applied to wealthier clients, or institutional buyers.That's why I like individual muni's.