Skip to main content
No. of Recommendations: 2
It’s no secret that bonds (and most other asset-classes) aren’t presently cheap. But it is never the case that some money can’t be put to work in a tolerable manner. The shopping isn’t as easy or fun as other times. But money can be put to work if an investor is willing to shop hard and to do his/her due-diligence. I run an all-bond portfolio that invests “across the yield-curve and up and down the credit-spectrum.” On average, I achieve my benchmark, which is to rank in the top 10% of all fund managers with the same investment-objective. That is roughly equivalent to the performance of fund balanced 60%-40% between stocks and bonds. But I don’t like the stock-game. So I substitute spec-grade bonds for stocks and weight them at 40% of the portfolio.

That’s an unconventional way of doing things, but I can make it work for me, good markets and bad, and achieve a real-rate of return (after taxes are paid and inflation is subtracted). Said another way. I’m not trying to appreciate capital. I settle for the lesser goal l of moving purchasing-power forward against a time when it might be needed. E.g., with a tax-rate of 25% and an experience of inflation that is 6%, an average return of 8% breaks even. With a properly-diversified portfolio (based on any asset-classes), 8% isn’t hard to do. I happen to use bonds exclusively. Other investors use other asset mixes. The key in each case is to take on sufficient risk, so that one’s long-term goals will be achieved with the sort of proper margin of safety that Ben Graham advocates.

Some investors think they can forecast the direction of interest-rates. I know I can’t. So I don’t try. I simply “average in”, putting 10% of my money to work each year, no matter the level or direction of prices. That isn’t to say that I’m willing to buy anything. But I’m willing to buy in judicious amounts the least worst of what might be available. Some weeks, I buy nothing. Some weeks, I buy several positions. But I shop daily and weekly, always looking to see might be available. That is the key to bond-investing. You have to know where prices are, so that when you see what seems to be an opportunity, you can vet it and execute (or back away). YTD, I’ve added 18 new positions, at an average-price of 77.941, with an average credit-rating of Baa3/BBB-, an average-CY of 5.8%, an average-YTM of 9.3%, and an average-maturity of 21.3 years.

Comments:
-My CY is low, because 22.5% of the buys (by dollar-weight, not face-weight) are zeros.
- My YTM is relatively high, because 38% of the buys (by dollar-weight, not face weight) are less than invest-grade or unrated.
-My average-maturity is mid-range to long, because that’s where the best value generally is.
-73% of these buys are corporates. The remainder are munis.

Standard Disclaimer: There are as many ways of doing bond-investing as there are bond-investors. The preceding is one investor’s choices and not a recommendation that anyone else do the same.
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.