Many retirees are nervous about expanding their portfolios with bonds due to the uncertainty of the rising rate interest rates. Nevertheless, individual bonds or bond funds are a necessary component of a diversified portfolio.
Bonds are generally thought to equal safety and income. They serve as aballast to the equity or growth side of your portfolio. Both are important for today’s retirees.
What are Individual Bonds?
An individual bond is a debt security with a fixed maturity date. Until that date, the bond makes regular payments or coupons–usually twice per year. When you purchase an individual bond, the market value of the bond considers a handful of factors. A couple of which include the issuer’s credit rating and current interest rates.
Key Facts About Individual Bonds:
- Like all bonds and bond funds, they can and do fluctuate in value.
- Higher yields typically mean higher default risk.
- Set maturity date (some bonds are callable).
- Slightly illiquid.
- Holding till maturity is generally a good strategy.
The biggest benefit to individual bonds is that once they are purchased there is generally no on-going costs. With mutual funds you’ll pay an on-going management fee. You should note that with individual bonds, traders will earn a spread off the transaction. That’s true inside mutual fund as well, but because of a mutual funds size, the spreads are much tighter.
Because of the complexity with individual bonds, consider using a trader that specializes in this area. They can custom design a bond portfolio or ladder based on your yield and duration preferences.
If you decide to add a individual bonds to your investment portfolio, consider using at least 10 to 15 names to give you some diversification.
What are Bond Funds?
Whereas individual stocks and individual bonds are analogues, so to are individual bonds and bond funds. Bond funds are a collection of bonds which are laddered with different investment characteristics, amounts, maturity dates, and yields.
Key Facts About Bond Mutual Funds:
- Professionally managed.
- Generally better diversification at a lower cost.
- Ideal for automatic investment.
- Establish nearly any schedule for withdrawals from a bond fund.
Choosing Between Bonds and Bond Funds
We use both. The lion’s share of our client money is in a variety of bond fund–from very stable/conservative short-term funds–to more aggressive global funds and everything in between. Choosing between individual bonds and bond funds depends on your goals in retirement, and your comfort with risk.