Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Here’s How You Build a Bond Portfolio That Works

Interest-Rates / US Bonds Sep 05, 2019 - 03:11 PM GMT

By: Jared_Dillian

Interest-Rates

When you invest in bonds, do you buy individual bonds or bond funds?

  • Unless you have a lot of money, you should probably buy bond funds.
  • And even if you do have a lot of money, you should probably buy bond funds.

Let me explain.


Little Diversification

I have owned individual bonds in the past, for speculative reasons. If you have a brokerage account, they are not that hard to buy.

But individual bonds are not as liquid as stocks. The bid-ask spread (a measure of market liquidity) on a typical bond could be two points wide for a retail client. That is pretty illiquid, so it’s not the type of thing you day-trade.

Short-dated high-grade corporates will be a bit tighter, but it’s not .01 wide like a stock.

If you buy individual bonds, you are probably holding them to maturity. This is especially true in the case of munis, most of which are very illiquid.

I will say that owning individual bonds is fun. It is cool when the sem-iannual interest payment hits your account.

But the big problem with owning individual bonds is that it is hard to achieve diversification unless you have a lot of money.

You can achieve diversification with 20-30 stocks. If you own 20-30 bonds, you are still not very well diversified. If one or two of them defaults, your entire returns go down the drain.

This is why people buy bond funds, which have hundreds and hundreds of bonds.

If you really want to be an investor in a diversified portfolio of individual bonds, you are probably going to need $5-$10 million, plus another couple of million for your stock portfolio.

Or you can do what I do, which is punt individual bonds around from time to time.

With individual bonds, if you are right you make a little. If you are wrong, you lose everything. Investing in individual bonds is a negative art.

Investing in bond funds is not.

Bond Funds

There are a lot of bond funds to choose from. This is pedantic enough, I am not going to go through them all here.

Let’s assume that we are talking about a corporate bond fund of some sort, high grade or high yield. It has hundreds of bonds.

How do you evaluate bond funds?

Well, you look at the yield. And you look at the credit quality. These are things that will be in the prospectus or fact sheet. If you are like me, you will dig in to see what’s in the portfolio.

Pro tip: the manager of a bond fund counts. Even more than a stock fund. The best managers will put up the best returns year after year.

Also, don’t trust the Morningstar ratings, because the Morningstar folks look at costs, which you shouldn’t care about.

(I mean, if a corporate bond fund has a current yield of 3% and has 1.50% operating expenses, then yes, you care about costs. By all means, look at the operating expenses. But unless they are grossly out of whack, you shouldn’t care all that much).

Bond ETFs

Bond ETFs, of course, are an alternative. Maybe.

Some of the most popular bond ETFs—LQD (investment grade corporate) and HYG (high yield corporate) are not something I would recommend because they are popular.

As you know, most ETFs track an index. This is true of bond ETFs. But the bond indices have a lot of bonds, and it is impractical for a bond ETF market-maker to own every single bond in the index.

So they own a subset of those bonds, and those bonds tend to be quite expensive. You, the retail investor, end up overpaying for bonds, which means you get lower yields.

Compare the yields of bond ETFs to open-end mutual funds—you will see they are much lower.

Also, the ETFs tend to be trading vehicles. There are options listed on these ETFs, and short-term trading activity can really push them around.

Some dumb people have said that these ETFs will “blow up” someday, but that’s not true. Of all the things to worry about with bond ETFS, that is not one of them.

Building a Portfolio

Building a portfolio of bond funds is a bit complicated. Basically, you’re going to want a mix of Treasury, investment grade, high yield, municipal, and international funds, if you want to be diversified.

If you have a view on rates, you can overweight or underweight Treasurys.

If you have a view on credit, you can overweight or underweight corporate bond funds.

Etc.

I will say that people are pretty loaded up on high yield these days, because interest rates are so skinny.

But high yield is pretty strongly correlated with the equity market, so at some point people might find that they do not have the diversification they thought they had.

There is a lot to understand with bonds, which is, I think, a big reason people don’t invest in them as much as they really, really should.

Get Contrarian Investment Ideas from a Wall Street Veteran

Jared Dillian writes The 10th Mana free weekly newsletter for contrarian investorsEvery Thursday, he delivers a torpedo of incisive commentary that crushes consensus thinking and exposes the true workings of “Mr. Market.”  Subscribe now!

By Jared Dillian

© 2019 Copyright Jared Dillian - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in