Broker Check

Individual Bonds Belong in Many Retirement Portfolios

| February 25, 2014

Five Myths of Bond Investing

Myth No. 5: Individual bonds are better than bonds funds.” (This is not a myth in my professional opinion!)

Some long-time clients and readers may already be aware of my support for individual (investment grade) bonds – especially when held in a bond ladder. 

Individual (investment-grade) bonds may or may not be insured.  Unless we’re talking about U.S. Treasuries, we’re not saying that these bonds are backed by the full faith and credit of the U.S. Treasury.

But, over the course of time, the risk of losing your principal when held to maturity is very small.

Bond funds are a very different “animal;” and, in my opinion, they are an invention of the investment “manufacturing industries,” and not always a useful one, at that.

Let’s emphasize a couple of points:

It is true that when interest rates rise, it is possible and likely that the market value of an individual bond . . . and a bond fund . . . will drop. 

However, when held to maturity, the individual bond will be redeemed and the owner will retain / retrieve her capital value (assuming no default.)  

This ability to simply retain capital is simply not the case with a bond fund.  The great majority of bond funds have no maturity dates and therefore no mechanism to simply retrieve your capital value / principal.

Therefore, in my opinion, comparing individual investment-grade bonds to bond funds is like comparing apples to socket wrenches . . . not oranges.  The two investments have very different uses, advantages & disadvantages