Larry Denham believes that when it comes to Diversification, Bond Funds win hands down.
Bond Funds: Because the underlying portfolio of most bond funds includes many different types of bonds of various maturities, investing in a bond fund conveniently provides the investor with immediate and widespread diversification. With numerous different bonds represented in the fund, the investor’s exposure to the default /credit risk of any one issuer is minimized.
Individual Bonds: In Larry’s opinion, in order to achieve adequate diversification with the purchase of individual bonds, investors need about $100,000 or more invested in bonds of approximately 15 different issuers. The impact of a default will be greater within a portfolio of individual bonds than with a bond fund, because of the numerous and diverse holdings within a bond fund. When buying individual bonds, default /credit risk in most cases is addressed by limiting investment to essential purpose, high quality investment grade (preferably “A” or better) bonds.
In my opinion, I prefer the “B” or better rated bonds and sacrifice some safety in diversity. I believe that the expectable losses in issues going into bankruptcy over time will still give better returns than bond funds.
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