h...@g...com wrote:
> Given small amounts such as $15k or less,
> diversifying with bonds could be said to be tricky, due to
> transaction expenses of buying several companies' bonds.
> OTOH, if the amount was this low, arguably the advisor
> should have put you in a bond mutual fund. On the third
> hand, the yield likely was not as good on the bond mutual
> fund.

Elle those are good points...one thing you brought up that I want to get
feedback about - this issue of individual bonds vs. bond funds. I'm
repeatedly surprised by the willingness of individual investors to buy
relatively large & concentrated bond positions, when it's so easy to own
a diversified portfolio of hundreds of bonds via a low-cost mutual fund.
I have this discussion with clients too and this comes up from time to
time here on MIFP - one frequent poster was quoted in the WSJ about
losses on WorldCom bonds some years ago.

The principal objection I hear is this idea of a bond having a fixed
maturity date, but the bond fund not having that. For some strange
reason that's bad and there is this appeal of "well if I hold it I get
my money so who cares what happens along the way." In talking it through
it's easy to show the bond fund's lack of a maturity date as being
somewhat irrelevant, and the bond's "fixed value" being illusory, but I
can understand the idea anyway. And as we see from this thread what
happens along the way can introduce a lot more risk/uncertainty than any
bond mutual fund will have.

The notion of a potential 100% downside should give people more pause,
especially when the difference in yield is relatively small. And by
definition, the more higher corporate bond yields are associated with
the riskier issues so it seems this scenario comes up more than it should.

The other thing I've seen, which I also find surprising, is how many of
the capital raises by distressed firms end up in individual investor
portfolios - i.e. the bonds are sold to retail rather than institutional
investors. Ford was one example as I recall. These financial issues over
the past year have been another. I don't understand why an individual
investor looking for an investment in the fixed income (read:
conservative) part of the portfolio would gravitate to that kind of
offering instead of say a Treasury bond or a high-grade corporate bond
mutual fund. Again, lots of downside potential with a limited upside for
what is supposed to be the "stable" piece of the asset allocation pie.

To the OP - did you consider this issue at time of purchase - that
holding one bond implicitly increases your risk vs. holding a few
hundred of them? Why did you go that route?

-Tad

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