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The question could be generalized to 'funds vs their underlying', because many would-be stock investors ask what amounts to the same question. "Should I do my own stock-picking, or should I hire it out and buy a fund (open-end, closed-end, ETF, etc.)?

As the linked article suggests, there's no one, single, right answer with regard to 'bonds vs bond funds'. In fact, they suggest that what makes the most sense is to use both. But it all depends one's means, goals, skills, interests, objectives, and opportunities. Right now, the bond market --to use a technical term-- is very sucky. Prices are high; yields are low; and the Fed is committed to destroying price discovery. So, what's a fellow to do? Obviously, go back and review some basics while waiting for The Big Crash (TBG).

I like Fidelity's overview a lot. It's solid, thoughtful, honest, careful. But given that I'm "me", I've got some quibbles with it --that no one else needs to agree with--, specifically, what they say about obtaining "proper diversification". Here's my belief, which is easy to provide evidence for. "When markets are under stress, correlations go to 1.0." Therefore, when supposed "diversification" is most needed, it fades like the morning dew. But what spreading your bets widely does force you to do is to bet small, and that reduction in exposure to specific issuers is what's going to save your butt, not the fact that during stress-free times what your buying might not all wiggle and waggle in synch. In short, if you don't over bet your hand, you can't --better, 'likely'-- won't get thrown out of the game.

Fido suggests that if you're going to mess with corps or munis, you're going to need a couple hundred thousand dollars to build a diversified portfolio. I'd say their guess is both too small --a quarter million to half million is better-- and too large by about $190k.

Here's why I say "diversification" can be obtained with small money. The diversification needn't be synchronic. Although single corporate bonds can be bought, the position isn't often marketable. So you're better off buying at least 2, or not at all. So let's create a starter bond account and fund it with a modest $10k. That means you can buy just two munis, and the diversification police will want to arrest you for recklessness. But here's where things get interesting. If those two munis are solid double-AAs (or better) and GOs, your risks of default are so miniscule, you don't need the hedge that "diversification" supposedly provides. Therefore, if you're mainly making interest-rate bets --not credit-worthiness bets-- you can bond-pick with tiny money, and the fact you can hold to maturity gives you an edge over a fund with a comparable investment objective. Yeah, they're bigger. A lot bigger. But you can go toe-to-toe with them and --maybe-- even do better, because you're not paying annual fees and expenses.

(con't in the next post)

https://www.fidelity.com/learning-center/investment-products...
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