In this week’s State of the Market video, Chief Income Strategist Marc Lichtenfeld explains the pros and cons of investing in individual corporate bonds versus bond funds.
One major difference is maturity.
(No, we aren’t talking about giggling during sixth grade health class.)
In finance, maturity refers to the agreed-upon end date for a loan. In terms of bonds, that date usually coincides with repayment (assuming you held on to the bond).
And contractually guaranteed repayment at maturity is one of the reasons we love bonds so much. Bonds give us an easy way to store cash and score interest off it, all while hedging our bets in case the current market tides suddenly whip back around.
But unlike individual bonds, bond funds lack maturity. And without maturity, well… there isn’t much of a reason to invest in bonds in the first place.
That’s an important distinction to make because bond funds draw in clientele with attractive yields that cloak their shortcomings. The popular PIMCO Income Fund (PIMIX), for example, brought home total returns of 7.62% in 2017 and 5.38% in 2020.
Don’t be fooled – bonds and bond funds are fundamentally different assets. Too many novice bond investors fall victim to the apparent ease of experience, wisdom and high yields that bond funds lend to investments.
Behind the tint of those rose-colored glasses, bond funds negatively differ from individual bonds on the grounds of pricing, maturity, turnover and more. (You’re better off turning to dividend stocks if you’re chasing higher yields – and compounding interest.)
In this State of the Market, Marc explains why there are few instances in which bond funds ever make sense for the average investor – especially in regard to rising interest rates.
Check out Marc’s latest episode of State of the Market for free by clicking here.