Should you hold bonds through mutual funds, ETFs or directly?

Cost, variety and ease of implementation should factor in your decision.

Gail Bebee 11 April, 2017 | 5:00PM
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Courtesy of the stellar stock market performance of the past several months, your investment portfolio is likely underweight in bonds. But, before you rebalance back to your target asset allocation, now would be a good time to refresh your memory of the main options for investing in bonds -- individual bonds, bond mutual funds, bond exchange-traded funds -- to determine if the option you have been using still fits your personal circumstances. There are merits and disadvantages to each approach.

If you want to buy individual bonds, expect to spend significant upfront time and effort to learn the basics of bond investing. You will need a working knowledge of the types of bonds available (government or corporate; short-, medium- or long-term; high-yield or investment-grade, domestic or foreign etc.) and their features such as credit quality, maturity date and yield. You need to understand how to build a well-diversified portfolio of bonds that fits into your overall investment plan and how to buy and sell bonds. Even if you work with a financial advisor, understanding the basics of bond investing is essential, so you can critically evaluate your advisor's recommendations.

Purchasing individual bonds requires a brokerage account. Unlike stocks, there is no well-established public market where bonds are actively traded. Instead, your choice of bonds depends on what your broker has on hand. Bond prices are set by individual brokers. Commissions are normally built into the quoted price, but may be shown separately. Bond trading costs can be a substantial drag on returns, especially in the current environment of historically low yields.

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About Author

Gail Bebee

Gail Bebee  Gail Bebee is an independent personal finance speaker, teacher and the author of No Hype--The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com; her website is www.gailbebee.com.

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