An Introduction: The Corporate Bond Wars

Larry Denham, senior vice president and business development officer for Zions Bank wrote a good article called, “Bond Funds vs. Individual Bonds.”, published May 25, 2011. In that article, he made the argument that buying individual bonds is better than buying bond funds. Larry said, “That being said, with the availability of online investing, and after evaluating their circumstances and investment objectives, investors are learning how easy it is to take advantage of some of the benefits of buying individual bonds. Hence, without much publicity, it appears to this author that the argument has quietly shifted in favor of investing in individual bonds.”

It has been my experience from 1980 until now that the brokerage firms have been directing investors toward bond funds. Anyone insisted in investing their money in individual bonds was shown bonds with no or low yields or CCC rated junk bonds. In my case, my broker would not show me any bonds higher than CCC saying that they were not available or that he was not allowed to show them to me. If I was not a bond investor in the 1970s, I may have fallen for that line. Fortunately, around 2004, online brokerage firms with massive bond inventories became available to individual small investors. It was not long after that when I stop walking into full brokerage firm door. I probably will never walk in again.

In order to understand why individual bonds is better than bond funds, it is important to first understand both sides of the bond funds versus individual bonds argument. Most financial authors writing on the subject have focused on the following investment traits: (1) Diversification ; (2) Reinvestment of income; (3) Investment Control; (4) Cost; (5) Interest rate risk; (6) Liquidity; (7) Portfolio size.

In the next future blogs we will explorer these individual traits.