The Corporate Bond Wars: Liquidity

Here is Larry Denham opinion about Liquidity. He gives the advantage to Bond Funds.

Bond Funds: With bond funds, liquidity is readily available. If a person needs money for an unexpected expenditure or desires to change asset allocation percentages, an investor may sell shares of the fund at anytime at the current NAV less redemption fees, if applicable. As previously mentioned, depending on interest rate levels, the sale could result in a potential loss of principal. Liquidating a portion of the bond fund changes the amount of the fixed income investment and does not change the characteristics of the fund portfolio.

Individual Bonds: Individual bonds can also be sold prior to maturity. The prices for bonds sold in the secondary market are influenced by prevailing interest rates and like mutual funds could be sold for more or less than the original investment. If some bonds are less liquid than others, those bonds may be subject to greater price volatility.

It is important to note that short term objectives and short term investments should not be mixed with long term objectives and long term investments. Hence, liquidity is best accomplished by holding money in short term cash instruments in order to provide funds for unexpected needs. Fixed income objectives should then be met by separately purchasing bond funds or individual bonds that will be held to maturity.

In my opinion, this is what is wrong with individual bonds. Investors can get cash out of a fund in less than one business day. Most individual bonds are bought and sold on the “Over the Counter” market. An investor may put a bond up for sale and may never sale the bond. Most bonds on the exchanges such as the New York Stock Exchange may sell a bond in one business day.

I agree with Larry Denham. Don’t invest money in corporate bonds if you are going to buy a dish washer with the money in 15 days. On the other hand, don’t put your money in a checking account when you are going to use it to retire with, 30 years from now. Use the proper investment products and strategies when trying to achieve your objectives.

By the way:

As the morning of Aug. 5, 2011 started, I noticed on the market open that it was down over 300 points. As I found out, that was the best time of the day. Upon one person finding out that their stock IRA was in serious trouble called me up to tell me that the economy was in the “shitter.” Later that evening, a person who knows very little about financial markets thought that he was teasing me by asking, “How are your stocks doing?” So this morning Aug. 6, 2011, I thought that I would tell everyone how my stocks are doing.

As of the morning of Aug. 5, 2011, my Bond Portfolio is up 5.14% YTD. If you count my yearly contribution, it is up 11.9% YTD. The market measured by the Dow is down 3.16% YTD. At this rate, this looks like the third year that my bond portfolio is going to beat the market. My portfolio has less than 5% stocks. So my Portfolio went down .92% vs. the Dow being down 4.31% for the day. I protect myself on the down side of the market by investing in individual bonds and very little stock.

As I said in 2008, I believe that we are in the first Great Depression of the 21st Century.