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HD recently posted about the use of iBonds from Treasury Direct. They should be looked at in terms of investing your cash that is not tax-deferred. My use of bond funds is to constantly ensure that in retirement I will have sufficient cash to withdraw funds to make my RMD. Having needed cash available via TD and iBonds that are held long enough is something I can deal with. I haven’t had to mess with them since the kids are now grown and have families of their own. The HD article is worth reading. I hope it was HD 🙂
Don’t buy any bonds. Social Security will be your fixed income source. Today, if I was collecting Social Security (my goal is to wait to age 70), the income generated each month would be like owning over $2M in a 10-year bond that also gives a cost of living raise sometimes. That is an insurance policy guaranteed by the govt. printing press.
A bond fund is simply a basket of individual bonds securitized in a low-cost way. People get caught up in interest rate risk and say foolish things like “a bond fund has an infinite duration” which is just not true. While a bond fund’s NAV will go down as rates rise, maturing bonds get replaced with higher rate bonds, so the yield to maturity rises. Thus, rising rates are actually a good thing for fixed income investors over the long haul. You’d rather have a 6% current yield than a 2% CY, right?
And individual bonds require more leg work and trading effort. Not to mention possible liquidity issues.
I don’t have the knowledge to decide which individual bonds are most appropriate for my situation, so funds and ETFs are an easy choice. And the bonus is that the risk is spread out so much more widely.
I have mixed feeling about owning individual corporate bonds. I had setup a ladder with A and above issues. There were a few unexpected downgrades (due to M&A), and a few got called away too. I remember getting stuck with a few issues that I no longer wanted to keep, but the liquidity weren’t great and I had a hard time in disposing them. Too much effort for too little gain. I haven’t had any problem with individual Treasury as they are highly liquid.
Target-maturity funds (bullet funds) are handy for ladders – the fees are reasonable given the benefits of issuer diversity and much better liquidity. I have separate funds for short and intermediate terms, and both inflation-protected and regular ones. I think the convenience of funds outweigh the hassle of managing individual issues.
I had better luck with individual preferred shares (non-Bank), especially the cumulative ones with favorable tax treatment. Most of them were bought during market shocks and at a nice discount to par. The income is decent. I don’t intend to sell them anytime in foreseeable future, though a few got called too.