Bond funds fluctuate in value. So...

[Nutria]

as you're heading towards retirement, will you buy individual bonds (and buy more with the dividends, until you retire)?

[Petunia 100]

No, I will stick with bond funds.

Individual bonds fluctuate in value too. You don't price them every day, so you just don't see the fluctuation.

[disneysteve]

Great question.

At some point, I would like to start investing in individual bonds instead of bond funds. I know that it's the better way to go as far as locking in a predictable income stream is concerned. The day to day fluctuations in value are irrelevant if you hold the bond until maturity. Bond funds have no set maturity so the income can fluctuate.

My parents started buying individual bonds probably 30 or so years ago. My dad died in 1992 and my mom has maintained her portfolio, replacing bonds as things matured, and that has been a big part of her income for the past couple of decades.

[Nutria]

Individual bonds fluctuate in value too. You don't price them every day, so you just don't see the fluctuation.

But that's irrelevant if you hold them until maturity.

[Nutria]

My parents started buying individual bonds probably 30 or so years ago. My dad died in 1992 and my mom has maintained her portfolio, replacing bonds as things matured, and that has been a big part of her income for the past couple of decades.

It sure would be great if annuities paid corporate (mix of investment and "high yield") bond rates: put your million dollars in at age 65 at 5%, and get $50,000 a year for 25 years...

[disneysteve]

It sure would be great if annuities paid corporate (mix of investment and "high yield") bond rates: put your million dollars in at age 65 at 5%, and get $50,000 a year for 25 years...

That would be nice. She hasn't done quite that well, especially in recent years with near-zero interest rates, but she's done okay. Even today her broker can usually find her something in the 3% range which isn't too bad considering, but years ago it was definitely higher. I don't recall the specifics.

[scfr]

I currently hold some individual Treasuries. And yes, I do expect to buy more as I get closer to retirement, though I don't necessarily think that they will represent a larger percentage of my portfolio.

I wish that I could have an IRA account at Treasury Direct. Alas, I can't.

[kork13]

The benefit of individual bonds is that they provide a predictable income stream for the duration of the bond. But that's only good news if inflation stays level or goes down. If (when) inflation and/or bond rates rise, that income loses its buying power, and you see comparable bonds now earning 6%. So do you sell your bond that's stuck at only 4% and only just keeping up with inflation, or do you sell (at a discount) in order move that principle info a new, higher-earning bond? That's one of the main problems that bond funds run into as well.

I see it both ways, and thus expect that I will always do both. I have a few individual bonds that I will likely hold to maturity, but I also do hold the majority of my bonds in bond funds. Just like in stocks, values and yields go up and down with the tides of the market. Ride it out, and over the long term, things tend to work out.

[disneysteve]

If (when) inflation and/or bond rates rise, that income loses its buying power, and you see comparable bonds now earning 6%. So do you sell your bond that's stuck at only 4% and only just keeping up with inflation, or do you sell (at a discount) in order move that principle info a new, higher-earning bond? That's one of the main problems that bond funds run into as well.

That's why it's important to ladder your maturities so that you have bonds maturing regularly that you can roll over into the prevailing rate at the time. You don't want to lock up all of your funds in 30-year bonds.

[Petunia 100]

But that's irrelevant if you hold them until maturity.

Agreed. I feel the same way about fluctuations in the value of a bond fund. Of course, I don't hold long-term bonds, so do not expect large fluctuations on a daily or even annual basis.

[Captain Save]

Bonds are not the best strategy right now .. unless you're expecting a negative interest rate ..

[corn18]

A TIPS ladder makes a good home grown pension replacement. Set it up as a base income and you have inflation protected income. Could also buy a SPIA.

[MakeAStash]

I'll buy bonds if the prices come down, a lot. The bond market remains in irrational exuberance mode, way too pricey for me. That's why some this year have called bonds "return-free risk".

[Petunia 100]

Bonds are not the best strategy right now .. unless you're expecting a negative interest rate ..

I believe holding a broadly diversified portfolio of stocks and bonds is always the best strategy.

[kv968]

That's why it's important to ladder your maturities so that you have bonds maturing regularly that you can roll over into the prevailing rate at the time. You don't want to lock up all of your funds in 30-year bonds.

Laddering individual bonds is a good way to help eliminate interest rate risk and market fluctuations due to the ability to hold them to maturity. However having a properly diversified individual corporate bond portfolio can cost a lot of money (typical par value of $1000 and often a minimum lot of 5). And that's not taking into consideration the slippage of the bid/ask.

A different, and possibly better way, to hold a diversified corporate bond portfolio with a finite maturity would be to buy an ETF with a set maturity date such as those issued from Guggenheim:

Guggenheim

or iShares:

iShares

Granted these ETF's have a few quirks about them so they won't totally mimic an individual bond holding but they provide much greater diversification than can probably be obtained on your own.