Your Very Own Bond?
Tuesday, December 22nd, 2009Trends are funny animals. Animals travel in herds and packs and the herd mentally tends to drive our financial security decisions. Precisely inverse to how we should operate! We were wondering if we missed some vital laws of retirement or education funding “absolutes”.
When it comes to choosing investment vehicles, we have been thinking “…why can’t and why shouldn’t the average investor acquire individual corporate, muni, treasury or even government agency bonds; at least for a portion of his/her overall portfolio? In fact, with so many problems afflicting all forms of stock, bond, ETF funds lately; with account balances continuing to go the wrong direction, and just wanting to have some control over what your working dollar will be worth (someday!)
Simply put, we want, you want to place a dollar today into something which we know is save, we know the interest it will pay out and we know its value for certain upon maturity; at least for some of our chips. Long before Wall Steet ruled the world with mad scientist “investment medium” invention, we purchased instruments; CDs, dividend paying stocks, T-bonds, corporates, munis, etc. to serve a very specific and predetermined purpose.
As funds, pools, trusts, and policies of every conceivable flavor were not relentlessly peddled by Wall Street through Madison Ave., we did our homework and made our own selections. We closed and managed our own deals sometimes with professional help, sometimes not. We lived in the age of doctors who gladly and regularly made house calls. Now, with all the markets malaise, we are suggesting “going forward to the basics”. That the most safe, most dependable investment you can make is to buy individual bonds, not funds, when NOT if interest rates begin to rise again.
The bond fund darlings will take a beating as their prices decline. If rates rise sharply, quickly, bond prices will plummet. At least when you buy your very own personal bond you will know exactly where you stand even in the worst case, with rates rising if you simply hold till maturity. You know with certainty that you will get your principle back while earning market or higher interest rates along the way; depending upon credit risk, maturity date and liquidity.
For example, if you could buy a Marriot International Inc. (Hotel chain) bond yielding 6.5% with a 2015 maturity, would you? We would! Houston investor Todd Kulp did just that. If you buy into a fund, the value might not recoup for a couple years; at least with your own bond, you receive par value upon maturity. Here’s how it works; how we see it. These are not normal times; rates basically have only one way to go…UP!
This being the case, why would you buy into any bond fund of any type of kind, unless the maturities were extremely short (180 days or less) or your products were 100% government insured? Either way, to preclude principle loss in these days through a fund, you are looking at 3%-4% on the high side; nowhere near 6.5%.
Historically, corporate bonds have earned 1.96% over Treasuries. For our money, realizing that all bond yields have decreased, we like corporate bonds even more; especially AAA credits, like Marriot. Only 5 years out, this type of arrangement seems to be a safe and fair bet. Still if you abhor any risk whatsoever, buy the 10 year T-bond currently yielding 3.4%. No mystery here! Your bank or broker will be happy to oblige your wishes to fill your individual bond orders.