Bonds: The Unbeaten Path to Secure Investment Growth

Chapter 13. HOW TO BUY INDIVIDUAL BONDS A Tool Kit

THE MOST COMPELLING reason to buy individual bonds is that bonds come due at a defined time. Unlike bond mutual funds of any kind, individual bonds pay their face value in cash at maturity. This distinguishing characteristic is a key ingredient in many aspects of financial planning. Need a large chunk of cash for a tuition payment on December 15 ten years from now? Buy a bond that matures on December 1, 2017. Planning to retire? Buy a continuing series of bonds that come due when needed. The list is almost endless.

A frequent question investors ask is how do you choose between buying bonds and bond funds? There are a number of issues to consider. Diversification is a key one. Advisers suggest that if you have $50,000 to invest, you can purchase a sufficient range of high-quality securities to adequately diversify credit quality. If you can hold your bonds for five years, you are better off purchasing individual bonds. If you need liquidity or do not have enough assets to diversify your purchases, then it is better to purchase a fund. Also, some types of securities are simply better held through funds, including Ginnie Maes, junk bonds, and certain types of foreign bonds. Keep in mind that funds usually hold either stocks or bonds, and virtues attributed to funds are actually the result of the nature of the securities that are in the portfolio, as we will discuss in chapter 14.

Although the case for buying individual bonds is a simple ...