The Secrets of Bond Investing
by Steve McDonald, Investment U Research
Tuesday, February 7, 2012: Issue #1703
Bond investing is the answer to most investors’ needs; not their get-rich-quick dreams, but their real needs. So, you’d think the bond market would be doing everything possible to get these survivors of the stock market into bonds…
But they aren’t!
In fact, the bond market seems to do everything possible to keep the small investor out.
The walls, buying restrictions and ridiculous pricing structure of bonds are set up to keep the little guy out of individual bonds and in bond funds. Bond funds that have all kinds of flaws; hedging and very long average maturities, the implications of which most investors don’t fully understand.
But bond investing can have some real advantages. They’re custom made for investors who:
- Want returns above what savings or CDs are paying
- Are tired of the wild fluctuations of the stock market
- Those who can’t afford any more of the losses they have incurred in the past 10 or 12 years
- Those who need more reliability and predictability in their investments
But plenty of problems stand in the way of the novice investor who’s simply trying to buy a bond:
Lack of Exposure
Unlike most investments, there are no 24-hour television networks that have a constant flow of bond investing ideas. And most bond information that does exist consists of the 10-year Treasury, overnight rates and confusing quotes about rising and falling rates, Treasury auctions and prices.
Frankly, the information available from all sources, The Wall Street Journal and Barron’s included, is useless! I don’t think I’ve ever seen a news story about an upcoming corporate bond offering, and if there was one, the offering was sold exclusively to institutions.
Lack of Information
Second, just getting to a page on an online broker’s site to invest in bonds is ridiculously difficult.
Go to any broker’s website and click on “Trade Bonds,” and you’ll get something that looks like this:
What you’re supposed to do with this chart is beyond me.
To get any sort of usable information and know where to click to get to the next page (it’s never clearly marked), you must fill in as much information as the U.S. government wants from folks joining the military.
Here’s a partial list of the information that’s needed:
- Cusip
- Frequency
- Maturity
- Coupon
- Yield
- Price
- Quantity
- Current Yield
- Bond
- Bill
- Notes
- Zero Coupon
- Indexed
If the average guy knew this much about bond investing, he wouldn’t need a broker at all.
Even if you can come up with all the information necessary to find some bond possibilities, you usually end up with a list of thousands of bonds and no information about any of them other than their cusips and descriptions.
Lack of Access
Can you imagine having this much trouble trying to find a stock to buy? It’s absurd – but absurd by design – designed by the market to make small-time bond investing virtually impossible.
You see, the bond market doesn’t want the small guy. They only want the big money, and they price their bonds accordingly.
If you buy 10, better yet 20 bonds or more, you have your pick of any type of bond and at the best price. But how many people have $20,000 to invest in each trade? The answer is: very few.
Try to buy five, or just one bond, and the most-likely answer you’ll get from a bond desk is: “We can’t sell one bond,” or “It isn’t worth it to you to buy so few.”
Baloney! What they really mean is that they don’t make enough money on a trade that small to make it worthwhile to them.
Plus, the small bond investor is annoying to the gods of the bond desks. The bond gods don’t like the little guy. They do annoying things like ask questions and expect the people on the bond desk to speak English, not the tree-fort, insider-only lingo they have concocted.
Better Returns without Leveraging
The fact is: You can buy one bond.
Yes, it’ll cost a little more and you’ll get a little less if you sell it before maturity. But most stockbrokers know so little about bonds, they don’t know this, either.
And fortunately, the increase in buying price isn’t so great that it makes a significant difference to the average guy. A bond desk will make the increased cost for small bond orders sound like the end of the world, but do the math and it isn’t that bad.
When you buy individual bonds instead of bond funds, you can get better returns without any leveraging. Leveraging is one of the biggest unknowns to bond funds investors, and it will come back to haunt them.
Investing in individual bonds also allows you to buy many small positions in many different industries. This has the same effect as diversifying in your stock portfolio.
As you diversify, you also have the opportunity to spread your maturities over a much shorter range, preferably less than a seven-year average. The best part is you have control of the maturities you hold and you aren’t bound by a bond fund’s prospectus – which can cost you a lot of money when rates run up.
Buying many small, ultra-short bond positions in this market is the only way you won’t get crushed when rates turn back up. Even though we don’t expect any real uptick in rates for about three more years, you can’t risk holding long maturities (in excess of a seven year maturity). Long-term bond investing isn’t prudent!
The Oxford Club is a good place to begin to learn about the benefits of individual bonds. They have a list of brokers called the Pillar One Partners. Many of these brokers will buy as few as one bond and all of them have met our standard of excellence and have been a part of the Club for many years.
Bond investing can be the answer to almost all of the needs of the average person. It may take a little effort to get to the same level of comfort you feel with stocks, but it’ll be worth it.
Good Investing,
Steve McDonald
Any investment contains risk. Please see our disclaimer.
20 Responses to “The Secrets of Bond Investing”
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Love your article…I could not agree more with the info needed…now…where do I find it. So far the best I find is my broker will allow me to search for limited investment grade bonds. The yield is a wonderful what 1 or 2%. None allow you to search High Yeild.
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Would like to see a bond portfolio as part of your income newsletter.
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Bring back your Bond Trader, it was one of the best services on the market.
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Three years ago I retired and downsized from a large family house to a nice retirement condo. I invested the cash leftover from the sale of our house into California GO’s with an average yield of around 4.75%. During a time when insured CD’s are around 1% I am getting a great yield tax-free plus appreciation. Last year my bond portfolio increased over 20% in market value. The interest payments on California GO’s are covered by a factor of 8 times even with California’s budget problems. The interest on Go’s are second in line behind education and are ahead of all other budget items. Most people don’t know this.
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I bought several of steve’s ideas
Colt has dropped from 87 to 67….What’s going on??
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Always enjoy Steve’s articles on bonds. Have been looking for an Oxford service that has Steve recommend specific bonds – can’t find it. Please inform. Would like it to be part of Chairman level.
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Steve,
Your Bond Trader service was one of the best things I ever subscribed to. Please bring it back.
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Sounds great. So where can I get the bond info discussed with all the other “noise”
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I agree with Jack and Francis. Bring back the Bond Trader or include bonds with another newsletter.
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your long word PERSENTIONS are as bad as your video presentions,, hype & crap…too many words & no useful information….Just a word….y sales pitch. NO THANKS
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love
Love your bond articles. You have hit the proverbial nail on the head. Going back to Oxford web site to learn more, but other readers are correct we (oxford members ) need more from you!!
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I think Steve McDonald is the BEST WRITER on Investmet U along with Alexander Green and Steve Stuggarud!!!!!!!!!!!!!
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Thanks, Steve, for your honest talk about the difficulties facing the neophyte bond investor. I’ve been turned off more than once in my efforts to add good bonds to my portfolio. If equities were as dificult to access as bonds are the market would be an empty windswept place.
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Excellent article. However still very vague about the basic knowledge of knowing when and how to decifer whether a bond is safe and a reasonable investment. many recommended bonds are not listed in a dicount brokers portfolio making it that much more difficult for the little guyto divercify. Would love if you could provide more basic “steet” knowledge aboutpicking abond or fund. You know, when wouldn’t you and when would you buy. Or a good book to provide such insight. Thanks for all you do.
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I am one of those many retired who probably will do better with bonds than constantly working the equities markets. But who can I turn to re bond advise? Why hasn’t Oxford established a bond rep. to educate, guide and recommend bonds to us?
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Please, please bring back the bond trader – or at least some sort of bond portfolio in the Ultimate Income letter. I think that Steve is teasing us with his intimate knowledge of the bond market and not coming forth with recommendations that could help us retirees who need that more stable income. How about it Steve?? you need a column for bond recos!
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I love the bond section in the monthly income letter. Can you guys put together a newsletter specifically for bonds. That would be amazing!!
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I too love the articles by Steve and would really like to see a regular column on bonds at the least and a trading service at best.
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Great article Steve. I came across this website called http://www.BondsOdds.com and they seem to offer a community to discuss trade ideas, blogs and pricing etc. totally dedicated to the bond market. It’s a free site. Share it with your subscribers if you think it helps them. -Jim
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I agree with several others here. I think Steve’s recommendations should be included in the bond portion of the Oxford Club’s Ultimate Income Portfolio. I have followed Steve for a couple of years & am doing very well with his recommendations that were in The Bond Trader. I was very disappointed when the service was discontinued. I think people need to learn more about investing in individual bonds & Steve makes it all very easy! As we get closer to retirement, this is more important than ever!!
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