Are BONDS An Option for the smallinvestor?

Now that interest rates are so low, and the stock market is in the doldrums, I’ve begun to take an interest in bonds. You can buy FORD MOTOR CO. bonds-maturing in 2009, yielding 7 3/8%. However, they present some issues for the small investor:
-minimum order is $25,000
-sales commissons are high (around $300.00/trade)
-liquidity is an issue, you can wait several weeks to sell, sometimes
With all of this,should a small investor EVER contemplate purchasing bonds? or is it better to buy a bond fund, (or wait till this stock market returns to life)?:smack:

You certainly can by bonds and a bond fund makes sense if you are a small investor. I would go so far as to say that a conservative investment portfolio should include bonds.

However, now is probably the time to buy stocks, which are down, not bonds, which are up.

Marketplace did a segement this week about bond funds and REITs, both of which have been outperforming stocks.

In an effort to diversify my portfolio, I invest in a bond fund and I think that the practice is generally encouraged for just that reason - better not to have all of your eggs in one basket.

Bonds and Bond Fund have some important inherent differences.

  1. If you buy a fixed rate bond, and hold it to maturity, you know in advance what your nominal return will be–you get a fixed more-or-less conservative return, insulated from market volatility. (You are not, however, protected from inflation which may erode the purchasing power of the face value of the bond during the time that you hold it.)

  2. If you buy a bond and decide to sell it before maturity, all bets are off. If interest rates have increased, the value of your bond will have declined and you may not be able to sell it for its face value. If rates have decreased, your locked-in high rate may mean that a buyer is willing to pay more than face amount for the bond.

If you buy a Bond Fund, you are asking someone to buy and sell bonds on your behalf, so you are in situation #2–the value of your shares in the Bond Fund may increase or decrease above or below your initial investment due to interest rate movements and inflation. Because Bond Funds need liquidity to allow people to invest and withdraw funds every day, they typically do not hold bonds to maturity.

A Bond Fund is therefore not a fixed rate investment with a predictable return; nothing wrong with bond funds, but they are not really like bonds. (They are usually more conservative than stock funds, however.)

What Humble Servant said is correct.
Bonds and bond funds are not the same. Bond funds can have losses, too! Even if there are NO bond defaults. Meaning none of the companies go bankrupt or failed to pay interest and etc.

Small investors who have under $100k in investable assets should look at funds to invest instead of buying bonds directly.

If you have over $500k to invest, you are noted as an accredited investor, and I will recommend you look at hedge funds or asset managers.

On another note, diversifying is not good. Remember everytime you diversify, you are supposedly reducing your risk. This maybe true for some people, but that is not a rule and has no statistical data to back it up.

What statistics can back up is that if you have a strategy to reduce risk which happens to have your investments invested in several different places, then you are reducing your risk. Statistics does not back up that it is safer to invest in different investments. The reason is that when the market goes down, it often hurts all investors disregarding what investments you are in, including bonds.

Also note, that most risk reducing strategies mean that you will lose less, but gain less, too. historically, it has been better not to buy several stocks but just a few and then hedge your investment to protect against losses.

That is what hedge funds do. Hedge funds in principle give you a more risk-free investment. But you have heard that hedge funds are risky and dangerous and loses billions. Well, that is true because hedge funds can reduce risks, but it can also do the opposite and be very risky. So it really depends on the general partner aka the man who controls the investment in the hedge fund what he wants to do.

I just wanted to dispell the notion that bond funds are safer than stock funds; and also that diversifying your investment is better.