Conclusion: The Corporate Bond Wars

This is the view of Larry Denham, senior vice president and business development officer for Zion’s Bank.

So what’s the answer? Is it more advisable to invest in bond funds or individual bonds? Is the answer still determined by the summation of each investor’s individual circumstances and investment objectives? Let’s suggest an answer by reviewing some of the more obvious conclusions and allowing the reader to decide his or her own investor profile.

If an investor;

(a) desires as much diversification as possible in order to protect against default/credit risk,

(b) is looking for a quick entry into the fixed income market with the on-going convenience of automatic reinvestment of interest earnings,

(c) chooses not to be involved in the underlying investment decisions,

(d) understands interest rate risk and that there could be a loss of principal if interest rates are higher when shares are sold, and

(e) is willing to pay management fees and fund expenses………

Then you want to buy a bond fund.

On the other hand, if an investor;

(a) has at least $100,000 or more of investable, fixed income assets,

(b) wants to retain investment control,

(c) desires relatively predictable income,

(d) intends to protect principal by holding bonds to maturity, and

(e) is looking for lower expenses by virtue of buying bonds online directly from the secondary market.…..…

Then you should buy individual bonds.

It is Larry Denham’s opinion that gradually more and more investors will be attracted to the advantages of purchasing individual bonds. And as investors learn the ease of buying individual bonds online, the investor shift from buying bond funds to buying more individual bonds will likely accelerate.

Nevertheless, decide which type of investor profile you are and start investing!

My Opinion

I agree with most of what Larry says. However, you don’t need $100,000 to get into buying individual bonds. I got started with a few thousand dollars in my IRA. So did my friend (see my friends chart at top) decades ago.

Online brokerage commissions are as low as $4.95. I pay about $10.00 at my online firm. As of today, looking at my friends account on the morning of Aug. 18, 2011, it was worth $97,499.41. It is down from its all time high but that is due to the bonds in his portfolio selling at a premium. Now they sell at or a little below par giving my friend an opportunity to buy more of the same bonds at a more reasonable price.

With his portfolio of junk corporate bonds, you can see how much that stock market crash affected my friend.

But let me add that these investments such as individual bonds or mutual funds are not guaranteed. You still pay your money and take your chances.