Commentary 5/3/2013

Kerry wrote a blog post about the benefits of individual bond portfolios for the Wall Street Journal’s Voices blog with one of their reporters. If you have a Wall Street Journal subscription you can read the blog here:

For those of you without a subscription the main points are summarized here.

The biggest benefit to owning your own individual bond portfolio is customization. Bond mutual funds and exchange traded funds tend to be generic and may not be in harmony with your objectives.

Bond portfolios can be engineered to match incoming cash flows with liabilities or reflect a specific risk tolerance or time horizon.

To effectively build a custom bond portfolio, it’s necessary to have at least $250,000 to invest in bonds to achieve appropriate diversification.

As interest rates have declined, finding high-yielding bonds has become more difficult. We look for bonds that have stories. These are bonds where value can be found by doing extra research into the security.

Examples of ‘story’ bonds are collateralized mortgage obligations, steepener notes and municipal bonds that, on the surface, may appear very risky but, after deeper investigation, are significantly less so.

Perhaps one of the biggest benefits to holding an individual bond portfolio is that the whims of the market aren’t as much of a concern. Rates may go up and the bond values may fall, but because income is being generated as expected and your principal is returned at maturity, the value of the bond itself isn’t as important. Bond funds are very much affected by interest rates. When rates rise and bonds lose value, mutual fund holders tend to sell. This locks in losses, permanently lowering the value of the investment.