Buy bonds or funds?
Question: My advisor recommends buying bonds directly rather than putting money in a bond fund. Could you comment on it? Particularly, if one holds a government bond to maturity, there is no risk, whereas bond funds are vulnerable to negative returns, particularly if rates go up (they are low right now). – K.G.
The problem is that you can’t get a diversified bond portfolio by buying them individually unless you have a lot of money. If you are going to go that route, I suggest buying short-term bonds. You don’t want to be locked in to 10-year bonds if interest rates start to rise. Sure, there is no risk if you hold until maturity, but would you be happy with a 5% yield if rates have risen to 8%? – G.P.