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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76394  
Subject: Re: bonds vs bond funds Date: 1/21/2000 1:23 PM
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The choice between muni bonds and corporates depends on your incremental tax rate. If you are retired, and your rate is low, corporates are probably a better choice. Usually, you need to be in the top tax bracket to benefit from the tax free munis. By the way, there are also double tax free (free of state taxes) and triple tax free (free of state and city taxes) which can be of interest if you live in one of the higher tax rate areas.

If you have large enough amounts to invest--usually $5K minimum, but $25K preferred--owning the bonds themselves is a better choice. With a bond (or CD), at maturity you get your money back--regardless of what happens to interest rates. With bond funds, you can be forced to take the loss.

Bond funds do spread the risk, work best for small investors, and can get somewhat higher returns as a result, and they give you more flexibility on when you can get your money, but its usually not worth it if you think interest rates will rise. They are great when interest rates are stable or falling.

Fools do not recommend holding bonds. Even for retirees, the recommendation is keep all your assets in stocks (for protection against inflation) with only 3 to 5 yrs needed expenses in laddered maturity treasuries. You will have to decide for yourself if you are willing to take the risk, but switiching to stocks is the right move. An S&P Index fund will average 12% return over time, but has paid 20 to 30% in recent years. This is quite a bit better than bonds. Because stock prices are high, a correction is always possible, but I think a major crash is unlikely in an election year.

Best of luck to you.
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