Be Your Own Bond Fund Manager
If you're about to make a sizeable commitment to bonds, think twice before dialing your favorite mutual-fund company. When it comes to high-quality bonds such as Treasuries and AAA-rated corporates, there's little aside from convenience a fund can give you that you can't get on your own. In fact, if you have $50,000 or more to invest and plan to buy and hold, picking your own bonds can be a cheaper, more profitable way to go.
According to a study taken by the Charles Schwab Center for Investment Research, an investor with $50,000 can build a diversified portfolio of high-grade bonds for no more, and often less money, than a comparable low-cost mutual fund. And do-it-yourself investing looks even better when you consider the typical bond fund's expenses. Treasury funds for instance charge an average of 0.77% of assets each year.
Another reason to go it alone is that pros have little edge when picking Treasury, AAA-corporate, and insured municipal bonds. Such bonds stand virtually no chance of defaulting, and trade frequently enough to give individuals price data to secure good deals. So, investors face only one risk - that rising interest rates will punish bond prices. Since the pros have proved no better than others at forecasting rates, it makes no sense to pay one to do so!
If the direct route appeals to you, buy at least five high-quality bonds maturing at different times. One method is to put at least $10,000 each into 2-, 4-, 6-, 8-, and 10-year bonds. When the two-year bonds mature, reinvest the proceeds in new 10-year bonds. This laddering reduces the risk of losses that result from rising interest rates - which punish short-term securities less than long-term ones.
Bond funds still have a place in many portfolios. If you can only part with a little money, funds are the best route. And if your idea is a short stay in bonds, funds are the best solution because transaction costs can sink do-it-yourselfers who trade.
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According to a study taken by the Charles Schwab Center for Investment Research, an investor with $50,000 can build a diversified portfolio of high-grade bonds for no more, and often less money, than a comparable low-cost mutual fund. And do-it-yourself investing looks even better when you consider the typical bond fund's expenses. Treasury funds for instance charge an average of 0.77% of assets each year.
Another reason to go it alone is that pros have little edge when picking Treasury, AAA-corporate, and insured municipal bonds. Such bonds stand virtually no chance of defaulting, and trade frequently enough to give individuals price data to secure good deals. So, investors face only one risk - that rising interest rates will punish bond prices. Since the pros have proved no better than others at forecasting rates, it makes no sense to pay one to do so!
If the direct route appeals to you, buy at least five high-quality bonds maturing at different times. One method is to put at least $10,000 each into 2-, 4-, 6-, 8-, and 10-year bonds. When the two-year bonds mature, reinvest the proceeds in new 10-year bonds. This laddering reduces the risk of losses that result from rising interest rates - which punish short-term securities less than long-term ones.
Bond funds still have a place in many portfolios. If you can only part with a little money, funds are the best route. And if your idea is a short stay in bonds, funds are the best solution because transaction costs can sink do-it-yourselfers who trade.
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posted by Bob Moser at
4:47 PM
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