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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35387  
Subject: Re: "Long Bond" - buying and rolling Date: 2/13/2006 12:24 PM
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Someone wrote: Similarly, those with small sums to invest, say under $50K, probably would be better off in bond funds than owning Treasuries. Even I-bonds are probably a better deal for most.

Vicki asked: Why?


I presume that whoever wrote the statement above referred to the liquidity of bond funds, and the fact that you can often open a bond fund, with small assets.

However, I disagree with the above statement.

I think that you should learn about the basics of bonds vs. bond funds. Then, you should weigh your personal need for liquidity (how immediately will you need the money?) against the different types of fixed-income, non-mutual fund possibilities.

Bond funds have one disadvantage: the Net Asset Value (NAV) drops, if prevailing interest rates rise. The longer the duration of the bond fund, the more the NAV will drop. This can cause you to lose money, if interest rates are rising.

Some other types of fixed-income instruments (I-Bonds, CDs) have one disadvantage: they are not as liquid as a bond fund. To avoid losing interest, you have to hold them to maturity. For example, if you have an I-Bond, and need the money in less than a year, you can't get it.

Bonds (Treasuries, corporates, etc.) can be held to maturity. However, if you need the money, you can sell them on the secondary market. If you sell them, during a period of rising interest rates, their value can be lower than you paid, so you can lose money.

The answer to this: figure out when you will need your money. Keep a good e-fund of liquid money (I like 1 years' income), in a money market fund. For you investment (non-e-fund) money, it's quite reasonable to buy CDs and bonds, not mutual funds.

Wendy

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