Quote:
Originally Posted by collie1228
I sent the following question to "Ask Matt" at the USAToday Personal Finance page:
I’ve read several columns and articles on bond funds, and I am not convinced that it is ever a good idea to purchase a bond fund. If I buy shares in a bond fund, the value of my investment may go up or down depending on that fund’s performance in the bond market. I may make money or lose money based on that market. But if I take the same money and buy actual bonds, the worst I can do is get all of my investment back, along with the published interest rate over the period of the bond. Other than default risk, I can’t lose. And better yet, if the prices of bonds go up, I can always sell my bonds at a premium if I wish. Can you come up with an economically sound reason why anyone would rather buy bond funds than the actual bonds?"
Matt's answer to my question was in today's paper, but he really didn't answer my question - in fact he changed the question so he could explain how bond prices work, which I already know. I'm still looking for a good answer to my question - why would anyone buy a bond fund versus buying an actual bond. It seems like a no-brainer to me, but I'm open to be convinced otherwise. Opinions?
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Buying a bond fund or in fact a stock fund protects you from financial disaster if say the company you buy goes belly up say Lehman Bros. or GM
One of the best ways to protect against changes in interest rates is to buy a bond ladder. You buy a bond today with say 10% of the total amount you want to spend on bonds. Then you buy your next bond say 3 to 6 months later. Now depending on the length of the bond, say you buy a bond with 3 years to go, you can go through your cycle and then start all over again. Of course interest rates do change but you will have your basket. You can also do this with CDs but current interst rates do not make this very appealing.
Good luck!