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Upside of bond funds
Scott Berry, senior mutual fund analyst at Morningstar, generally favors bond funds but says there are times when buying directly can work well for an individual.
"With individual Treasury bonds and some individual
insured municipals it can make sense to buy bonds directly. Those
are two areas where fund managers don't add a lot of value, so an
individual may want to look there. But with a fund you get very
good, professional management at reasonable cost and you don't have
to worry about doing all the legwork. With the individual bond you
have more control, but the fund's added diversity outweighs that
and the added credit risk in most cases."
Berry says you can get marketlike returns and a good
mix of bonds with Vanguard's Total Bond Index (VBMFX), which he
considers a core, intermediate-term holding. If you prefer something
more actively managed, he suggests Fidelity's Total Bond fund (FTBFX),
which he says is designed to add value in different sectors of the
market.
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10-year Treasury bond
yield |
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Like Hopwood, Berry advises steering clear of dedicated corporate bond funds because he says you're not compensated for the additional risk.
Don't forget expenses
It's important to pay attention to fees and expenses when you're considering a mutual fund. Vanguard's Total Bond Index has an expense ratio of 0.20 percent, while Fidelity Total Bond, which is more actively managed, sports a 0.45 percent. Riskier bond sectors will be more expensive, but Berry says be very careful if you see an expense ratio in the 0.75 percent or 1 percent range.
"See what the manager is doing. It has to be different from what a typical bond manager is doing. Maybe they're taking on risk, investing in securities that take a lot of research. It's unlikely that they'll be dramatically better than a bond index fund."
Monitor allocation
A key to good performance in any portfolio is monitoring allocation
-- it's a forced discipline, says Hopwood.
"Keep your eye on the ball. What is your allocation supposed to be? If it's supposed to be 60 percent stocks and 40 percent bonds and you haven't rebalanced in the past year, then it's out of whack because the stock market has done very well. We don't worry if someone is a couple percent over their allocation, but if they're 10 percent over we're going to shave it."
Most brokerages sell Treasury bond funds, but if you'd
like to buy individual Treasuries, visit the government's Treasury
Direct Web site.
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