When it comes to the fixed-income piece of your portfolio, you need to ask yourself whether bond funds or individual bonds make more sense...
NEW YORK — When it comes to the fixed-income piece of your portfolio, you need to ask yourself whether bond funds or individual bonds make more sense.
After years of saving, that’s a question many baby boomers now face after amassing sizable nest eggs that now need to be preserved and transformed into a paycheck of sorts.
Ultimately, the amount you have to invest in fixed income and your investment goals will determine which is best.
Individual bonds provide a predictable stream of income for a set period.
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Bond funds, on the other hand, don’t have a specific maturity date so you risk losing your principal, for instance, if interest rates rise, causing bond prices to fall. And while individual bonds become less risky as they approach maturity, funds are always subject to rate risk.
Funds do, however, provide instant diversification, less credit risk, as well as easy, automatic reinvestment of income. It’s also easier to simply pull your money out, often at no cost, if you need to.
So which is better? The sum you have to invest plays a significant role. As a rule of thumb, several advisers say at least $100,000 is needed to assemble a portfolio of individual issues, though some advisers say it can be done with as little as $50,000, particularly if you’re a fan of Treasury bonds since there’s virtually no credit risk there.
When building your portfolio, the cost of buying (and selling) are baked into the bond’s price. Barclays Global Investors offers six bond exchange-traded funds, which track bond indexes, but trade like stocks, and have low expense ratios of 0.15 percent and 0.20 percent.
It’s important to comparison shop, and, if you’re using an adviser or broker, be sure they have access or contacts in specific markets.