Fixed Income Preparation
Some investors in the Bond Market choose to build their own diversified arrangement of funds. They create a ladder strategy to help them stay as safe as possible during the entire year.
This, of course, means they must manage their plan meticulously, taking the sizeable fees and maturity dates of dozens of bonds into consideration constantly.
As a result, many investors who buy individual bonds wind up taking on less risk and sacrificing return in the process. And those who do seek out higher returns tend to take on a disproportionate amount of risk, McGinley said.
"When I speak to investors, the ones who make the argument for putting together their own portfolio of bonds will say ‘I don’t need to be that diversified, because I just buy triple-A rated Treasurys or municipal bonds,’" McGinley said. "My suggestion to them is, you’re giving up the return potential that comes with buying different types of securities. You’re avoiding risk, but you’re avoiding potential return as well."
For most investors, bond mutual funds solve a number of problems, providing instant diversity and professional management, generally at a reasonable cost. Of course, one advantage to owning individual bonds — and stocks, for that matter — is that it puts you in control of when securities are bought and sold, and when capital gains are generated. On the other hand, by owning a mutual fund, you’ll be turning record-keeping and portfolio management worries over to a professional.
A mutual fund might make more sense for the smaller investor.
Few of us have the resources, personally, that a banking institution has. By dollar cost averaging with mutual funds, we’re able to invest like a millionaire on a fixed income.
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