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Sound Advice: August 16, 2023

Buy Bond Funds, Not Individual Bonds

Investing in bond funds can be a suitable option for many investors who prefer exposure to a diversified portfolio of bonds rather than investing in individual bonds. Bond funds are mutual funds or exchange-traded funds (ETFs) that pool money from multiple investors to invest in a diversified portfolio of bonds.

Here are a few reasons why some investors choose bond funds over individual bonds:

1.     Diversification: Bond funds typically hold a wide range of bonds issued by different entities, such as governments, corporations, and municipalities. This diversification helps reduce the risk associated with investing in a single bond. By investing in a bond fund, you spread your investment across multiple bonds, which can help mitigate the impact of any defaults or credit risks.

2.     Professional Management: Bond funds are managed by professional fund managers who have expertise in analyzing and selecting bonds. These managers actively monitor the bond market, make investment decisions, and manage the fund's portfolio based on the fund's investment objectives. This can be advantageous for investors who may not have the time or expertise to research and select individual bonds.

3.     Liquidity: Bond funds offer greater liquidity compared to individual bonds. Although individual bonds may have limited liquidity, bond funds can be bought or sold on any trading day at the fund's net asset value (NAV). This makes it easier for investors to enter or exit their positions in bond funds, providing more flexibility.

4.     Affordability: Investing in individual bonds often requires a substantial amount of capital since most bonds are typically issued in minimum denominations (e.g., $1,000). Bond funds, on the other hand, allow investors to participate in the bond market with lower minimum investment amounts. This accessibility makes bond funds more attractive to individual investors with limited capital.

It's important to note that bond funds are subject to their own risks, including interest rate risk, credit risk, and management risk. Investors should carefully consider their investment goals, risk tolerance, and investment horizon before investing in bond funds or any other investment vehicle. Consulting with a financial advisor can provide personalized advice based on your specific circumstances.

 

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N. Russell Wayne, CFPÒ

Any questions?  Please contact me at nrwayne@soundasset.com

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