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I’m hesitant to buy bond funds with yields at low levels and prices quite high. But do you agree? Are bonds individually something to consider now? Or that's out of reach for someone with very little to invest? Are funds a yay or a nay? What would be best for an aggressive long-term investor at this stage?

Stas,

Small money is the least important part of learning how to invest for the paradoxical reason that, no matter how much money one has, there will always investments that require too much money to be done prudently. Or as Keynes, a very bad economist but an astute market observer, once said, “The market can stay irrational longer than you can stay solvent.”

If you truly are the “aggressive, long-term investor” you describe yourself to be –and if you’ve been poking around CEFs, then your self-identification is credible-- then there are a couple paths you could take, which come down to Howard’s, Jack’s, Scott’s, Paul’s, Chris’, or mine. (And my apologies to anyone I’ve left out who is pursuing a distinctive, fixed-income strategy that is truly meets the definition of “investing”.) The differences among us amount to the asset classes we explore and the extent to which we use “fundamentals” and/or “technicals” in our decision making.

Par for a corporate bond is typically $1,000. However, the bonds of interest to an “aggressive, long-term investor” are typically selling at a steep discount to par, which can be as much as 70-80%. In other words, when markets are stressed and bonds are cheap, excellent investment opportunities can be found for as little as $200-300. E.g., years ago, I bought Internet Cap’s something of something in the mid-20’s. I was called at par three years later for a gain of 100% per year. I still own Xerox’s 8’s of 27 that I bought at 33. Within a couple years they had run up to par. Currently, they’ve backed off quite a bit. But meanwhile, my income stream is 25%/year. A couple of my cheaper buys this year have been Alcoa’s 5.87’s of 22 bought at 60.647 and up 52%; Hanson’s 6.125’s of ’16, bought at 44.555 and up 48%; GE’s 6.1’s of ’30 bought at 64.200 and up 42%. So not only can bonds be bought cheaply, their returns can be quite attractive.

Crummy bond brokers (Scottrade, Ameritrade, etc) require a minimum purchase of 5-10 bonds regardless of the minimum size set by the underlying desk actually selling the bonds. But the better bond brokers (chiefly, E*Trade and Zions Direct) follow the minimums set by the underlying desk. Often those minimums are a single bond. Thus, someone with enough money to meet the minimum to open a brokerage account (typically, $2,000), can begin to buy their own bonds. It does not take the $50,000 that is usually advised (which is bad advise in both directions, for being too low and too high, depending on the strategy one is pursuing).

In short, the problem a typical, beginning, fixed-income investor faces isn’t lack of money, but an over-abundance of choices: CEFs, ETFs, conventional mutual funds, corporates, preferreds, dividend stocks, interest-rate futures, etc. Furthermore, each of those “asset classes” can be dealt with in a multiplicity of ways, so that the paths one could choose are nearly infinite in their varieties. With bonds, “If there’s a will, there’s a way”. So it doesn’t much matter where you begin.

Enjoy your exploring, Charlie
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