Buying individual bonds - taking the plunge

[disneysteve]

I've often read about and researched getting involved in individual bonds but never pulled the trigger until today. I've gotten a bit concerned about having nearly all of our fixed income allocation in bond funds since their value is much more impacted by changing interest rates and there is no fixed maturity date with a fund. My mom has invested in individual bonds forever and has done well with them. She always holds until maturity so value fluctuations are of no concern. She just keeps getting her payments month after month, year after year.

I decided it was time to dip my toes into the individual bond market. I'm doing this in my SEP IRA which is with TD Ameritrade. I used their Bond Wizard to search for bonds with a 1-3 year maturity and Baa/BBB or better ratings. I didn't think it was wise to go longer than that in the current environment but figured that would get us a return that beats what the money markets are paying. In December, I sold some stock in that account so I've been sitting on about 10K in cash earning nothing.

I picked a bond from a large hotel REIT with a yield to worst of 1.548%. I'm familiar with the company and have stayed in a number of their properties around the country, not that that matters. The minimum buy came to just over $5,300 so not a huge investment but as I said, the cash has been earning nothing and in the current market, 1.5% isn't too bad. Switching this money into bonds is also part of managing our AA.

I'll report back with any updates of interest going forward.

Do any of you invest in individual bonds?

[james.hendrickson]

Love bonds - they go back to 2,400 B.C. They're an ancient investing vehicle.

[kork13]

I've never messed with individual bonds, but it seems like a very reasonable option for you.

Again, I'm ignorant.... So what does "yield to worst" mean? Could it end up yielding more than that, it's just the worst case scenario?

Looking forward, are you planning to build up a clutch of individual bonds similar to the structure your mother has used?

[disneysteve]

Again, I'm ignorant.... So what does "yield to worst" mean? Could it end up yielding more than that, it's just the worst case scenario?

Looking forward, are you planning to build up a clutch of individual bonds similar to the structure your mother has used?

A bond is issued with a stated interest rate called the Coupon rate. If you buy the bond when it is issued and hold it until it matures, that's the rate you'll get. If you buy the bond on the open market at some later date, it will be selling at a premium or a discount from the original price. As a result, the YTM-Yield To Maturity will be higher or lower than the coupon rate. Some bonds are Callable, meaning the issuer has the option of redeeming them early. The YTW-Yield To Worst is the rate you'll get if that happens.

The bond I bought today has a coupon of 3.875%. The YTW is 1.548. The YTM is a bit higher than that - 1.6 something I think (I don't have it in front of me). So the worst I can earn is 1.548. It could be higher than that unless the issuer calls the bond early.

[kork13]

A bond is issued with a stated interest rate called the Coupon rate. If you buy the bond when it is issued and hold it until it matures, that's the rate you'll get. If you buy the bond on the open market at some later date, it will be selling at a premium or a discount from the original price. As a result, the YTM-Yield To Maturity will be higher or lower than the coupon rate. Some bonds are Callable, meaning the issuer has the option of redeeming them early. The YTW-Yield To Worst is the rate you'll get if that happens.

The bond I bought today has a coupon of 3.875%. The YTW is 1.548. The YTM is a bit higher than that - 1.6 something I think (I don't have it in front of me). So the worst I can earn is 1.548. It could be higher than that unless the issuer calls the bond early.

Ah, thanks. I'm familiar with the YTM, the YTW with callable bonds is new to me.

[Singuy]

Not buying bonds because their value drops as interest rate increases...and with a zero % interest rate, it'll only go up.

[disneysteve]

Not buying bonds because their value drops as interest rate increases...and with a zero % interest rate, it'll only go up.

Irrelevant if you hold til maturity.

I certainly wouldn’t buy anything with a maturity more than a few years out though.

[bjl584]

My stepdad does very well with bonds.
He has been buying them for years now

[TexasHusker]

Got a good friend who is a bondsman, and he's done very well.

[rennigade]

I dont even bother with bonds. I have a savings account that fluctuates, it may be half a percent now. Im not willing to tie what little amount of money I would stick in a bond. The interest generated would amount to almost nothing. Seems like more of a hassle for a few extra bucks.

[disneysteve]

I dont even bother with bonds. I have a savings account that fluctuates, it may be half a percent now. Im not willing to tie what little amount of money I would stick in a bond. The interest generated would amount to almost nothing. Seems like more of a hassle for a few extra bucks.

Are you 100% stock other than your savings account?

We’re currently around 65% stock, 25% bond, 10% cash. So the amount we have in bonds is significant.

[james.hendrickson]

Oh my....

Okay, everyone forgets about bonds. And why would you get excited about them? Everyone is making big money in stocks and all the kids are interested in crypto.

That said, getting the most money the fastest isn't always best for everyone.

There are several very good reasons why you might want to hold bonds.

1. Income: Bonds are steady sources of income. Usually bond contracts say that companies have to pay their bondholders before their stockholders. So, the income is usually steadier.
2. Diversification: All things being equal, adding bonds to your portfolio improves diversification. The concept of diversification says that over time better diversification results in better returns.
3. Bonds Preserve Principle: Fixed income investments are excellent for people nearing the point where they need the cash they have invested. If you're going to retire in 5 years, you don't want to risk your money on the stock market. Similarly, if you have most of the money you need for your kids college education, you don't want to put it on Gamestop, you want to protect the principle so it will be there.
4. Tax Advantages: Some municipal bonds, as well as some Federal bonds, are tax free. This is key if you're looking to build a tax efficient income portfolio.

My eyes got opened to this asset class when I was looking at the late Senator John McCain's balance sheet in his Federal disclosures. He and his family owned a boatload of muni bonds, and they had lot of tax free income coming into their holding as a result. I was impressed by that.

[Fishindude77]

I've got a friend who does the investments for a local bank I deal with. When they have excess capitol that isn't loaned out to borrowers to get the best returns, they buy bonds. It's mostly municipal stuff, triple A rated, and much better than letting money sit idle. The downside is, your money could be tied up for awhile. From what I've been seeing, they are getting around 3% return.

I think some bonds would be a good diversification move for an individual with plenty of capitol, rather than having it all riding in the stock market, or in CD's that don't pay much. This is something I may do myself soon.

[rennigade]

Are you 100% stock other than your savings account?

We’re currently around 65% stock, 25% bond, 10% cash. So the amount we have in bonds is significant.

We do have around 10% in bonds I believe. I misunderstood your initial post. I thought you were buying savings bonds, where you had to hold on to them for a certain amount of time.

[LivingAlmostLarge]

Buying individual bonds give you a security of knowing exactly what will be paid out as well as when versus a bond etf or fund.