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Subject:  Bonds vs. Bond Funds, Yet Again Date:  7/25/2009  6:27 PM
Author:  junkman02 Number:  28286 of 36394

Someone asked the smart and shrewd question: “Is there a good lazy way to invest in bonds?”

Someone, in a misguided attempt at sarcasm, quoted the question and replied: Wow. Are you saying that you have never heard of a bond fund? AM

Why is AM’s question so laughable? Because she fails to understand the difference between a bond and a bond fund.

So let’s review basics, once again. A bond is a promissory note. A bond fund is a financial product sold by a company that invests in bonds. If an investor buys a bond he (or she) owns the bond. If an investor buys shares in a bond fund, he (or she) owns shares in an investment company that owns the bonds. In the former case, the investor owns the underlying directly. In the latter case, the investor is making a derivatives bet.

Mark Twain once quipped in another context, “There’s a world of difference between lightening and a lightening bug. A similar statement could be made about bonds versus bond funds. The two share some of the same words. But the two really are very different. One can claim that there is no difference between a portfolio of bonds that an individual investor owns and the shares of a bond fund he (or she) might also own, just as one can make any silly statement one wishes. But the reality is far different.

Can good money be made with either bonds or with bond funds? For sure, but the methods by which the would-be investor is making (or losing) his (or her) money are worlds apart unless, of course, the person likes to claim that, for all intents and purposes, things like ice and ice cream are always equally exchangeable. Yes, the two have something to do with each other, just as bonds have something to do with bond funds. But buying a bond fund is NOT an easy way to buy bonds. It is merely an easy way to buy shares of an investment company that invests in bonds.

So, let's return to the original question: "Are there good and lazy ways to buy bonds?" I think there are. But they have their downsides, just as does every shortcut. So what needs to be investigated is the upsides versus the downsides of various, bond-investing methods. (But that's a post for another time and, probably, a different audience.)


ignorant - 3 dictionary results
1. lacking in knowledge or training; unlearned. E.g., "an ignorant woman."
2. lacking knowledge or information as to a particular subject or fact. E.g., "ignorant of quantum physics (or basic investing concepts)."
3. uninformed; unaware.
4. due to or showing lack of knowledge or training: an ignorant statement.
1325–75; ME ignora(u)nt < L ignorant- (s. of ignorans), prp. of ignorare to ignore; see –ant

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