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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: Timing bond purchases Date: 12/3/2009 12:32 PM
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“Gentile” is in the eye of the beholder, right? So I’m going to let the chips fall where they may.

You write: In stock investing, DCA (dollar cost averaging) into broad index funds is generally accepted as the easiest method for a defensive investor.

To buy a stock fund isn’t investing in stocks. It’s investing in shares of an investment company that invests in stocks. Same-same with bond funds. To buy a bond fund isn’t to buy bonds. It’s buying shares in an investment company that invests in bonds. And it don’t make no difference whether the fund is an index fund or not. Someone constructed the index, making an active decision about what to buy. There’s nothing “passive” about indexing, just as there is nothing inherently good or bad about it. It’s a market-timing, securities-selection strategy, just the same as any other investing/trading strategy.

That said, there are some truly, excellently-constructed indexes being made available to investors at dirt-cheap expense ratios and even zero-transaction costs. Also, indexes are often the only practical means an investor has to access certain asset classes. So avoiding funds entirely for the machismo sake of always owning the underlying directly doesn’t make a lick of sense.

But the huge appeal of owing bonds directly is that they are puts. If the issuer doesn’t default, and if you hold until maturity, then price fluctuations can be ignored. Coupons will continue to be paid, and principal will be redeemed.

The question you need to answer for yourself is whether you have the resources to play the bond game versus the bond fund game. If you are dealing with tiny money, tiny time, and tiny interest, then you can’t play the bond game successfully. OTOH, if you’re a believer in DCA, then the bond fund game is wide open to you, and the more volatile the fund, the more effective DCA will be, which, ironically, will typically be the bond funds whose underlying is the most difficult to buy directly. So using funds becomes a win-win situation.

Best of luck with the project,
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