Bond Funds: What They Are...and Aren't
We're often asked whether it's better to invest in individual bonds or in diversified bond funds. Our answer is always the same for most investors:
We prefer individual bonds to funds.
Some bond funds, contrary to their name, mirror stocks more than bonds. Because funds buy and sell bonds before they mature, you have no guarantee of getting your original investment back in full. If you shouldn't be taking any risks with your principal, stay away from bond funds. Since bonds are rated for safety or lack thereof, you are much safer buying individual bonds with high ratings.
We recommend you buy individual bonds if:
- You have $50,000 or more to invest in individual bonds.
- You are retired or close to retirement, and looking for predictability.
Dolan Smart Money Move: Once you know the percentage of your portfolio you want to put in fixed-income investments, you can determine if you have enough money to properly diversify your bond purchases.
For corporate bonds, we recommend buying 10 to 12 different bonds; at $1,000 apiece, that would be $10,000 to $12,000.
With municipals you'll need $50,000 or more to properly diversify.
For smaller portfolios, the only individual bonds we recommend are Treasuries—T-bills, T-notes, or zero coupon bonds.
Get more of our investing strategies and advice here:
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Child Savings AccountsWhen opening a savings account for your child, make sure their Social Security number is used as the account's tax identification number. That way, as long as your child is under age 14, interest earned will be taxed at your child's lower tax rate, not at your tax rate. This rule holds true as long as your child earns less than $1,300 a year in interest. |
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