I had a job once, long ago, that included recommending/ranking newly issued corporate bonds for a Wall Street bank's clients. So I likely minimize the difficulty for an individual of investing directly in corporate bonds.
But here's a point that may get the conversation back on track: If you put your money into a Bond Fund, you do not own a bond. You own shares in the fund. And if your fellow fund holders all start to bail out at once at a time of a sell-off in bonds, then the Fund itself has to sell bonds to raise cash just when the market for bonds is selling off. So the value of the Fund declines, perhaps very sharply, even if the bonds are still safe.
So now you face an additional risk besides the risk that the bond won't be paid off. You are adding the risk of the nervous behavior of the fund holders.
I'd rather own a bond than a share in a bond fund. I take the points that Doug and Jordan make. But the people making decisions for the bond fund are pretty much, it seems to me, all reading the same tea leaves.
Finally, the risk in bond buying, to me, is more about the movement in general interest rates than about default by the corporation issuing the bond. If interest rates go up when you own a bond, your asset loses value. So forecasting interest rates rather than the corporation's solvency is where the money is to be lost or made.
Gene
On Jun 8, 2015, at 6:21 PM, lbo-talk-request at lbo-talk.org wrote:
> 17. Re: A bond market crash? (Jordan Hayes)
Carrol asks:
> "diversification if you're buying corporate bonds":
> The shorthand here is over my head. What is the point?
If you buy a single bond, and the company defaults, you're screwed.
If you buy a bunch of different bonds, from different companies, if any one of them defaults, you're probably okay. So: a bond fund, which has access to a wide variety of bonds, can do two things:
- Keep you from losing any single bond - Provide a range of yields, such that the aggregate is better (risk-adjusted)
than any single bond you can buy
If you can buy a bunch of bonds on your own, you don't need the fund, you are one :-)
/jordan