Bonds or bond funds?

Q – We recently purchased your 2002 mutual fund book. We are very impressed with it. We would like to invest a significant amount in bonds. We have conflicting opinions as to (a) should we invest in a bond fund (PH&N) or (b) should we purchase bonds directly?

We would appreciate your comments in light of the current market condition. – T.& I. R.

A – For starters, I am not a strong advocate of new bond investments at this time. Interest rates are nearing the bottom of the current cycle. When they start to rise, it will have a negative effect on bond prices. The longer the term, the greater the potential impact.

Investing in bonds directly is the cheaper route (no management fees) but you should have some knowledge of the bond market and how it works. As well, you should have a coherent portfolio strategy. Answer these questions:

1) Are you going to invest in a diversified portfolio of bonds?

2) Will you have a blend of maturities?

3) Will you use a laddered approach?

4) Will you include corporates? If so, how will you assess them?

If you have trouble coming to grips with suchssues, then a bond fund is probably better for you. In effect, you’ll be paying a manager to make those calls on your behalf. – G.P.