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Misconceptions About Individual Bonds vs. Bond Funds

beebee
edited October 2015 in Fund Discussions
"I don’t want to be caught owning bond funds in a rising rate environment. It’s much safer to own individual bonds and simply hold them to maturity. That way I am assured of getting my principal back and not taking any losses."

Sound familiar? I always find it fascinating when investors assume they can completely avoid risk in their portfolio without any ramifications. In this case, the individual bond advocates miss out on a few key points.
-Cliff Asness

misconceptions-about-individual-bonds-vs-bond-funds/

Cliff Asness, Top 10 Investment Peeves:

cfapubs.org/doi/pdf/10.2469/faj.v70.n1.2

Comments

  • Joe
    Another unmentioned thing about an individual corporate bond concerns knowing exactly what the bond provides the bondholder in terms of call rights, liquidation preferences, covenants, etc. Corporate bonds can have very complicated terms and it is unlikely most investors, except hopefully the professionals, will ever know exactly what they are buying.

    I agree with the linked article and think in most cases a bond fund is superior to the risk and cost of buying an individual bond.

    Joe
  • pcallum001
    Individual bonds are illiquid, so you may not be able to find what you want at a reasonable price. Open end bond funds, however, may wind up selling during a panic in order to meet redemption orders. Closed end bond funds often use leverage, but also often trade at a discount, and don't have redemption orders.
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