Bond Fund Investing

October 27, 2009

Bond funds probably aren’t the investments that you spend hours investigating and researching when building your portfolio or 401k.  Typically individual stocks or equity mutual funds are the primary investing focus and bond funds are an afterthought if they’re included at all.

However, bond mutual funds and their fixed income can be just as important a piece of any portfolio as equities. Although you can get more bang for your buck with stocks, bonds can help you level off the volatility of the stock market. If invested wisely, an investor can use bond funds to not only increase the cash flow of their portfolio, but also see some growth.

Bond Mutual Funds

So how do bond mutual funds work? Similar to stock funds; portfolio managers buy an assortment of bonds based on the objective of the fund and what is available in the market.

Most bond mutual funds pay off a monthly dividend. That dividend can be paid out to your brokerage account in cash or re-invested by buying more shares of that particular fund. Please be aware the even if you re-invest the dividends, they are taxable in non-IRA accounts.

Bond Fund Categories

Like stock funds, there are many different types of bond funds, and investors have the same ability to diversify. There are bond index funds, government bond funds, state specific bond funds, corporate, international, etc.

Bond funds can be based on the average length of maturity of the bonds in the portfolio (short-term, long-term, etc.), the average bond rating (AAA rated, junk bonds), or other specific objectives of the fund (strategic income, diversified portfolio, emerging market).

Bond Fund Analysis

When it comes to picking a bond mutual fund, an investor must go through the same type of due diligence they would for a stock fund.

  • Does this fund fit my objective?
  • Is it to aggressive or conservative for my liking?
  • Does it invest in the types of bonds I want to own?
  • What is the history of the fund, the manager and the company?

Rather than give you specific bond funds as a suggestion, I’m going to finish this article by discussing the two best bond managers in the business (in my opinion). Between the two of them, they have over 90 years experience in the bond market and have been successful year after year.

Bond Investor – Bill Gross

You may not know the name Bill Gross, but if you have a 401k or ever watch CNBC, you may be using his funds and have seen him on TV. Mr. Gross is the founder and managing director of PIMCO. He manages over $800 billion (yes, that’s a B) in fixed income assets.

His PIMCO Total Return Bond Fund is one of the most popular bond funds in 401k programs across the country. He has been named the Morningstar Fixed Income Manager of the Year three times and is a “go to” person for many different news publications and media outlets for his opinion on the bond markets.

Bond Investor – Dan Fuss

Dan Fuss is the Vice Chairman of Loomis Sayles & Company. He was named to the Fixed Income Analyst’s Hall of Fame in 2000 and is one of the most brilliant minds in the business today.

The equity side has Warren Buffett and the fixed income side has Dan Fuss. He has made a habit over the last 20 years of creating stock-like returns in his fixed income portfolios. In a previous life, when I was a financial advisor, every single portfolio I ever developed had his Loomis Sayles Strategic Income Fund in it.

Mr. Fuss is a much more aggressive investor than Bill Gross. I often used the two of them together almost as a yin and yang for bond portfolios. These men will bring a tremendous amount of knowledge and experience and proven to success to any portfolio. As always though, make sure the investments you choose fit your objectives, time tables and risk tolerance.     

Hopefully this look at bond investing will give some good food for thought as you plan out your portfolio.  For more on bonds, you can also read up on bond investing terms and some bond investing strategies.


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2 Responses to Bond Fund Investing

  • Alena

    I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


  • Magillicutty

    Please tell us what Bond Futures or Options on those futures are, and what strategies do you recommend for the coming interest rate hiking cycle (G8)? (G20)