Don't Buy Bond Funds!
Yes, that is a broad generalizaton to be sure. Obviously, there are certain circumstances in which a bond fund will do. But most investors who buy bond funds could do better elsewhere. Even those looking for income can find alternatives.
Bonds hold less return potential than stocks - a good two percentage points less on average, according to Sanford C. Bernstein & Co., a Wall Street research house. But when you place a bond in a bond fund, you run into some additional problems.
Bond funds carry high expenses. The average municipal bond fund sports expenses of 1.01 percent; the average corporate bond fund 0.91 percent; the average government bond fund 1.08 percent; the average international bond fund 1.40 percent; and the average emerging market bond fund 1.78 percent, according to Morningstar Mutual Funds.
A study by New York bond dealers Gabriele, Hueglin & Cashman comparing yields on individual bonds, unit investment trusts, and bond mutual funds found that bond funds consistently underperformed the other two, sometimes by more than 2 percent a year. The funds' fees depressed their yields year after year, making them less attractive the longer they are held, according to the study.
Bond funds are inconsistent performers, making it impossible to select one winner from a bad batch, according to a study by Lewis J. Altfest, a financial planner and professor at Pace University in New York City.
"There are no Peter Lynches in the bond market," Altfest says. "There are no bond funds that consistently outperform the average. One bond fund manager is just as good as another, and no one could outperform the indexes."
Few bond funds offer unique strategies. The thing that gives a mutual fund its franchaise - the quality of its management - plays only a small role in bond funds. The best bond fund manager might turn in 11 percent, and the worst 9 percent. In contrast, stock fund performance might range from +95 percent to -40 percent.
Bond funds don't allow you to target your own goals or employ your own strategies. If you buy a bond fund because you think bonds are a good value now compared with stocks, or because you think interest rates will fall and bond prices will rise, the bond fund manager can defeat you by moving into shorter-term bonds.
So what should you do? An investor looking for income might try some funds with a mix of high-dividend stocks, preferrerd stocks, utilities, and perhaps REITs. Two possible choices are the Vanguard STAR and Vanguard Wellesley Income funds.
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Bonds hold less return potential than stocks - a good two percentage points less on average, according to Sanford C. Bernstein & Co., a Wall Street research house. But when you place a bond in a bond fund, you run into some additional problems.
Bond funds carry high expenses. The average municipal bond fund sports expenses of 1.01 percent; the average corporate bond fund 0.91 percent; the average government bond fund 1.08 percent; the average international bond fund 1.40 percent; and the average emerging market bond fund 1.78 percent, according to Morningstar Mutual Funds.
A study by New York bond dealers Gabriele, Hueglin & Cashman comparing yields on individual bonds, unit investment trusts, and bond mutual funds found that bond funds consistently underperformed the other two, sometimes by more than 2 percent a year. The funds' fees depressed their yields year after year, making them less attractive the longer they are held, according to the study.
Bond funds are inconsistent performers, making it impossible to select one winner from a bad batch, according to a study by Lewis J. Altfest, a financial planner and professor at Pace University in New York City.
"There are no Peter Lynches in the bond market," Altfest says. "There are no bond funds that consistently outperform the average. One bond fund manager is just as good as another, and no one could outperform the indexes."
Few bond funds offer unique strategies. The thing that gives a mutual fund its franchaise - the quality of its management - plays only a small role in bond funds. The best bond fund manager might turn in 11 percent, and the worst 9 percent. In contrast, stock fund performance might range from +95 percent to -40 percent.
Bond funds don't allow you to target your own goals or employ your own strategies. If you buy a bond fund because you think bonds are a good value now compared with stocks, or because you think interest rates will fall and bond prices will rise, the bond fund manager can defeat you by moving into shorter-term bonds.
So what should you do? An investor looking for income might try some funds with a mix of high-dividend stocks, preferrerd stocks, utilities, and perhaps REITs. Two possible choices are the Vanguard STAR and Vanguard Wellesley Income funds.
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posted by Bob Moser at
2:36 PM
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