Q. I am currently invested in the Pimco Total Return Bond fund, which I’m very happy with. A financial planner is trying to convince me selecting individual high-quality corporate bonds would be more beneficial in terms of protecting myself from potential future interest rate changes and fluctuations. Do you agree with his assessment? Do you favor mutual bond funds or individual bonds? I am near retirement and am concerned with asset preservation.
A. Without knowing more about your personal situation, it’s hard to say which strategy would be best for you. It depends on, among other things, your overall asset allocation, how much income you need, your risk tolerance and how much money you have to invest. Individual bonds may require large initial investments, so it could take a big chunk of cash to buy enough bonds to achieve the same impact as a mutual fund.
"Mutual funds are great vehicles for diversification, as they can allow a smaller investment to enjoy the benefits of greater diversification that you could achieve with larger pools of money," said Jody D’Agostini, a certified financial planner with AXA Advisors/RICH Planning Group in Morristown.
By comparison, when using individual bonds, the number of holdings an investor will be able to purchase is typically limited, and thus each particular security will have a greater impact on the portfolio.
"The investor should understand the concentration risk and the potential impact if one or more of the bonds were to default," said Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown.
Kazanchy said you also should be cognizant of the fees that accompany your investments. With a mutual fund, the fund expense ratio is easy to look up in the prospectus or online, but individual bonds don’t have an expense ratio. Also, there are transaction fees which are very clear for mutual funds. With individual bonds, it is not very clear, he said.
"A bond broker is compensated by a bond spread — the difference between what the bond is purchased at and what it is sold for," Kazanchy said. "If an investor wants to purchase individual bonds on their own, they should have the knowledge and tools to evaluate the true cost of the broker’s compensation. If not, then they should stick to mutual funds."
The benefit of owning individual bonds is a measure of control, Kazanchy said, as the investor can decide if and when they want to sell or hold them to maturity. When holding shares of a mutual fund, you have outsourced control to the fund manager, who will decide how the portfolio is managed.
E-mail your questions to askbiz@starledger.com.
source: www.nj.com/business
Q. I am currently invested in the Pimco Total Return Bond fund, which I’m very happy with. A financial planner is trying to convince me selecting individual high-quality corporate bonds would be more beneficial in terms of protecting myself from potential future interest rate changes and fluctuations. Do you agree with his assessment? Do you favor mutual bond funds or individual bonds? I am near retirement and am concerned with asset preservation.
A. Without knowing more about your personal situation, it’s hard to say which strategy would be best for you. It depends on, among other things, your overall asset allocation, how much income you need, your risk tolerance and how much money you have to invest. Individual bonds may require large initial investments, so it could take a big chunk of cash to buy enough bonds to achieve the same impact as a mutual fund.
"Mutual funds are great vehicles for diversification, as they can allow a smaller investment to enjoy the benefits of greater diversification that you could achieve with larger pools of money," said Jody D’Agostini, a certified financial planner with AXA Advisors/RICH Planning Group in Morristown.
By comparison, when using individual bonds, the number of holdings an investor will be able to purchase is typically limited, and thus each particular security will have a greater impact on the portfolio.
"The investor should understand the concentration risk and the potential impact if one or more of the bonds were to default," said Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown.
Kazanchy said you also should be cognizant of the fees that accompany your investments. With a mutual fund, the fund expense ratio is easy to look up in the prospectus or online, but individual bonds don’t have an expense ratio. Also, there are transaction fees which are very clear for mutual funds. With individual bonds, it is not very clear, he said.
"A bond broker is compensated by a bond spread — the difference between what the bond is purchased at and what it is sold for," Kazanchy said. "If an investor wants to purchase individual bonds on their own, they should have the knowledge and tools to evaluate the true cost of the broker’s compensation. If not, then they should stick to mutual funds."
The benefit of owning individual bonds is a measure of control, Kazanchy said, as the investor can decide if and when they want to sell or hold them to maturity. When holding shares of a mutual fund, you have outsourced control to the fund manager, who will decide how the portfolio is managed.
E-mail your questions to askbiz@starledger.com.
source: www.nj.com/business
