Author Topic: Buying individual bonds and looking for safety  (Read 2364 times)

Beridian

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Buying individual bonds and looking for safety
« on: March 11, 2016, 01:29:35 PM »
I am 56 years old and nearing retirement (1 to 2 years).  I have a 401K with Fidelity and Roth IRA with TD Ameritrade, both allow me to purchase individual stocks and bonds.  I will have a pension income to augment my retirement savings account which makes me a little more willing to take risks (up to a point).   My allocation has been heavy into stocks and I got stung a bit over the past few months.  As such I think it is prudent to move some money into safer investments like individual bonds (as my stock losses recover).  I have avoided bond funds because with the interest rate situation it seems that bond funds have very little to recommend them, maybe I am wrong about this?

So my question is, how do I go about selecting individual bonds?  Since my accounts are tax advantaged I don't think munis make sense.  I am not averse to corporate bonds.  Like everyone else I am looking to minimize my risk and still get a reasonable return.  I wouldn't mind locking up funds in a bond for up to five years if the return was respectable (maybe even a bit longer).

So how do I wade my way through a sea of individual bonds and make a good choice?  Are there other investment options (though brokerage accounts) that I should consider for safety and income?  I already have Vangaurd Welsley, VYM, VDIGX, SPLV, and some GLD.

Thanks

Brian
« Last Edit: March 11, 2016, 02:04:17 PM by Beridian »

Thinkum

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Re: Buying individual bonds and looking for safety
« Reply #1 on: March 11, 2016, 01:51:43 PM »
Not sure about individual bonds, but I bought VCLT and have been quite happy with it. Yield started at 4.5% and pays monthly. It is now at 4.83% with a modest .10% expense ratio.

Indexer

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Re: Buying individual bonds and looking for safety
« Reply #2 on: March 11, 2016, 05:22:17 PM »
I don't see the advantage to an individual bond over a bond fund.

The reason a bond fund takes a hit when interest rates rise is because all of the individual bonds in the bond fund took a hit. I know people like to say you can hold the individual bond till maturity, but that doesn't change the fact that its market value was lower. If you had to sell that bond for some reason after rates went up you would see the drop in value.  The bond fund is really the same, maybe even better since it includes existing older bonds that are maturing along the way. If you plan on holding a bond fund longer than its duration then you actually kind of want interest rates to rise because as those older bonds mature and get replaced with new bonds you will see rising rates on your fund and give you 'better' returns in the long run than you would have received if rates had stayed low. And normally the duration of a bond fund is significantly shorter than the maturity of a new bond being issued.

The duration of VBTLX is 5.7 years. So if you plan on staying invested longer than 5.7 year you want interest rates to rise. VBTLX is mostly government bonds and it is paying around 2.2%. Find me a government bond that matures in 5-6 years paying 2%. You can't. You would have to find bonds with much longer maturities, likely 10 years+, to get that yield. The reason for this is that VBTLX has bonds it bought years ago that are maturing, and it will replace them with new bonds which could be paying higher yields.

So in conclusion I can't see any reason to pick individual bonds over bond funds.

Tyler

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Re: Buying individual bonds and looking for safety
« Reply #3 on: March 11, 2016, 07:11:48 PM »
A bond fund is basically a simple bond ladder that you pay someone else to run for you.  Performance of the underlying bonds is identical.  The two reasons to build it yourself are:

1) you pay no expense ratio
2) zero counter-party risk (risk that the person managing your bond ladder screws it up or does not act in your best interest)

The tradeoff is that managing it yourself is more work on your part.

I personally like low-cost bond index funds simply for convenience, but I can vouch that it is very easy to buy bonds directly through Fidelity.  They even have nice tools to help you build and manage a ladder.
« Last Edit: March 11, 2016, 07:17:38 PM by Tyler »

Seppia

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Buying individual bonds and looking for safety
« Reply #4 on: March 11, 2016, 07:40:16 PM »
Honestly: in today's environment I think one might as well hold cash.
Bonds pay negative rates in the short term (where I am in Italy that's THREE YEARS negative yield: WTF???)
I see absolutely no upside in owning bonds in today's scenario.

Extreme proposition: today, I would almost say it's better to own Exxon stock than to own bonds

Roland of Gilead

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Re: Buying individual bonds and looking for safety
« Reply #5 on: March 11, 2016, 07:42:49 PM »
I own some individual bonds.

One issue that is due in 2019 pays me 55% interest per year, the other due in 2018 pays only 50%

I have already gotten more interest than my original cost on the bonds, so it is all gravy from here.


Seppia

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Re: Buying individual bonds and looking for safety
« Reply #6 on: March 11, 2016, 08:33:26 PM »
Would love to hear the name of these bonds

mrpercentage

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Re: Buying individual bonds and looking for safety
« Reply #7 on: March 11, 2016, 09:09:47 PM »
The advantage of your own is others can not force the portfolio to liquidate at a discount. There are various bond brokers out there. I think vanguard will do it for you too. If you do municipal then you can completely avoid the oil mess and taxes and get a decent yield. I don't own any though. I own Exxon and RIETS.

I think municipal who be a nice match for you