How do you buy bonds?

[disneysteve]

We invest in a bond fund but I often think that I'd like to get involved with individual bonds, whether corporate or municipal or both. I know little to nothing about the process of choosing and purchasing individual bonds. How do you go about it? Where do you search and what do you look for? What criteria do you use to select the bonds? And then how do you actually purchase them? Should they be in taxable or tax-sheltered accounts ideally?

Any info you can share would be great.

[bjl584]

Morningstar is a good place to start looking at the bond listings. I'd stick with reputable corporate issues as opposed to the junk bonds.

You'll have to figure out a few basic principals such as par value, yield, time to maturity. If you don't mind having your money tied up for a potentially long time, you can often get a better return on your money from a yield standpoint than you would if you bought the same company's corresponding stock that pays a dividend. Example: Ford motor company's stock currently yields around 5.2%. They have bond issues that yield over 7%. Just be sure to check par and time to maturity and if the bond is callable.

[~bs]

my notes

reporting bonds for tax purposes if you're buying and selling is somewhat more difficult than stocks. might be easier nowadays since brokerages have the import feature into your return.

not really worth the additional risk, just buy BND and call it a day. Yes the valuation fluctuates due to the market, but it can go up as well as down.

tax advantaged or not depends on the type of brokerage account you're using. roth, ira, individual, etc.

you're going to take a haircut if you try to close the position out early. professionals aren't going to want to deal with your measly $1000 bond. This is as opposed to selling at NAV.

as long as the bond issuer doesn't go broke, yes you'll make that interest rate until maturity. if the interest rates turn the wrong way, you're locked into that rate, unless you attempt to sell, at which point, you'll take a beating.

[disneysteve]

not really worth the additional risk, just buy BND and call it a day.

What about in retirement? At that point, having individual bonds locks in your return so you have a predictable income stream (at least for the term of the bond). I can see where that would be advantageous.

[~bs]

I suppose it might be useful in that case.

but if you have retirement assets of 1 million, you'd be better off spreading it across many different bonds to reduce your risk. and if that's the case, that's what the mutual fund is for.

buying individual bonds, such as US 10yr bonds, you face a different form of risk in that if inflation and the yield jumps, you're left holding the bag on an investment returning 2.x%, while everything else might be much much higher. In real terms, you'd be losing money. You can ladder the bonds to mitigate the risk. But if you're going through the trouble to create a diversified bond portfolio, laddering them, etc. easier to just buy the fund, unless buying bonds is something you like doing.

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back to yoru original question. discount brokers allow you to purchase bonds directly. Also there's specialized bond investment accounts. I think the bond accounts may have much higher minimums.

[AJ444]

I'm under the understanding it it isn't easy for your average joe to purchase and manage a large portfolio of bonds which you would absolutely want to reduce your risk. If someone has information to the contrary I'd love to hear it.

I go with VBTLX Vanguard Total Bond in my tax advantaged space and VWIUX Vanguard Intermediate Term Muni in taxable.

[disneysteve]

I'm under the understanding it it isn't easy for your average joe to purchase and manage a large portfolio of bonds

I'm not really sure why it would be difficult. My mom has a portfolio of FNMA/GNMA bonds and has never had any trouble, but she does have a broker who actually makes the purchases for her. Otherwise, she just sits back and gets a check every month.

I guess the main issues are selecting the bonds and then keeping track of when things mature so that you can roll the funds over into new bond purchases. It's not just a "set it and forget it" kind of investment the way a bond fund is.

[Jluke]

According to another site I reference quite frequently bonds should be in a tax sheltered account.

There are tax exempt bond funds.

You might want to venture over to that other site.

See tax efficiency of various classes. There is a note section about tax exempt bond funds.

[AJ444]

I'm not really sure why it would be difficult. My mom has a portfolio of FNMA/GNMA bonds and has never had any trouble, but she does have a broker who actually makes the purchases for her. Otherwise, she just sits back and gets a check every month.

I guess the main issues are selecting the bonds and then keeping track of when things mature so that you can roll the funds over into new bond purchases. It's not just a "set it and forget it" kind of investment the way a bond fund is.

I'd be curious to know what her return are compared to the bond index funds. I think anyone could pick the bonds but are you getting anything for the extra work involved.

[kork13]

Personally, I just use I-Bonds, VBTLX, and VWITX. I've considered other options (particularly individual munis & corporates), but figure I wouldn't do much better for myself trying to do it all myself, so I may as well just leave the heavy lifting to professionals that are doing a fine job. I just don't know enough (or even know what I don't know) to be able to make informed decisions on my own. Besides, I highly prefer simplicity when it's readily an option.

[disneysteve]

So perhaps the question should be: When does buying individual bonds make sense as opposed to using a bond fund? I know that Suze Orman always spoke strongly against bond funds and promoted using individual bonds for your fixed income investments. It's been a while since I've heard her talk about it but I think controlling the maturity and interest rates were her main points. With a fund, you control neither of those things.

[AJ444]

I think this article does a pretty good job of describing both:

https://www.google.com/amp/www.cnbc.com/amp/2014/04/10/bonds-vs-bond-funds-what-you-need-to-know-now.html

It's when I get to this part that solidly puts me in the "fund" camp:

Individual bonds are best suited for investors who understand the nuances of the yield curve, have the time and resources to monitor credit risk and have sufficient means to construct a portfolio with adequate diversification.

[corn18]

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-do-i-build-a-tips-bond-ladder-for-retirement-income/

[LivingAlmostLarge]

I also have heard TIPS preached but right now with the 0% fixed rate portion it's not where it was when I reasearched it more. There was a time when it was 2% fixed component. Also I think having individual bonds made more sense I heard before when bond rates were good and CDs actually paid. With rates where they are it's not quite the same.

I wonder if it's almost better to invest in private loans?

[kork13]

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)