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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 35345  
Subject: Re: Bonds vs Bond ETF's Date: 11/26/2009 2:09 PM
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My impression of discussions of "bonds versus funds" that purport to be open-minded explorations of the topic is that the person has either already made up his mind as to his preferred choice, or is already leaning strongly in one direction or the other, and is simply doing a bit of half-hearted looking for counter-arguments by way of doing some half-hearted due diligence. E.g., an understanding of the term "diversification" is always assumed and is never explicitly defined.

My take on the matter of "bonds versus funds" is that both can exist quitely happily and effectively within a portfolio and that they are not equivalent games. Each has its own rules, hassles, and rewards. Some people will prefer one game rather than another. Some people will play both, or neither, and it just don't make a bit of difference in the total scheme of things, because the means by which capital can be conserved, preserved, or appreciated is, for all practical purposes, infinite in number. There really is no one right way or best way to do any of this stuff. Instead, the methods and objectives are as varied as the investors who borrow, create, or pursue them.

So a discussion of "bonds versus funds" really amounts to a report of the choices a person made for himself, and the reports vary in usefulness acording to how well reasons were explained. In the linked report, the person thinks he understands diversification, and he attaches a great deal of importance to it, thus pre-inclining him toward funds. Another person, such as myself, thinks diversification is over-rated as a risk-management tool, and he prefers to emphasize position-sizing as a means of controlling downside risks. For him, position-seizing can be employed with either bonds or funds. Other people will prefer to emhasize other aspects or qualities of the investing process, and they will make their choices between "bonds versus funds" accordingly.

Conventional wisdom suggests that investors with small accounts should choose funds over individual bonds. Sometimes "small" is defined with a dollar figure such as $50,000 to invest in the fixed-income portion of the portfolio. On previous occasions, I've argued that number can be both too small and too large, depending on the bond type(s) chosen and the method used to invest in it/them. But my current explorations suggest that accounts as small as $10k total assets under management can take on the task of investing in individual bonds (no matter the credit quality) if they are willing to be very aggressive about controlling their risks. My results are preliminary, but the numbers look good enough that I'll be launching a demo project using real money to test the concept of fixed-income "micro investing".
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