@Baker

Be careful about going too far into the bond world. They paid a little above inflation over the last 40 years while stocks have done markedly better averaging 4% to 7% above inflation. I would argue that over the long-term (25 years or more), stocks are safer than bonds in light of the effects of inflation and erosion of purchasing power.

First of all, picking individual bonds requires research to pick the right bond. Unless you’re just going to buy a safe bond (like from the US gov’t), you need to make sure that the issuing company isn’t going to go bankrupt before you’d get your money back.

Second, investing in individual bonds often requires a lot of capital. Most bonds that I’ve seen (and I’m not an expert in bond investing) have a face value between $1,000-3,000. Whereas, you can invest in a bond index fund with much less.

Paul

However, smaller government entities are less secure. Orange County, California, is but one example of a government entity defaulting on their bonds. WPPS (aka Whoops) was another instance. There have been others, less well-known, so you do take your chances when buying bonds.

Also, it would have been interesting to touch on the implications of bond interest rates to the national debt. People tend to freak out about the fact that the US government is taking on so much debt, because (I guess) they liken government debt to their own high-interest personal debt. But because bond interest rates are so low, the government can borrow money very, very cheaply, which can actually be a smart thing to do.

You also take the risk of the fund manager purchasing bonds that you would not because of the high risk of the entity borrowing the money. High risk equals high returns and with a high cost. For instance, research what General Motors bondholders are being forced to accept as the company flounders and what Orange County, CA investors experienced when the municipality when bankrupt back in 1994. Would you risk lending your money to such entities as they head into financial disaster? Your bond fund manager will risk your money, even if you wouldn’t.

Also, as individual investors buy and sell their shares of the fund, the fund is forced to buy and sell bonds within the fund whether or not the market is favorable to the transaction. This is why bond funds perform worse when compared to buying and holding your own bond purchases, along with the implications of holding tax-exempt bonds within traditional versus Roth retirement vehicles.

Purchase bonds yourself, hold them to maturity in tax appropriate accounts and avoid the inherent investment costs associated with a fund.

The current extremely low yields on bonds, on the other hand, are a result of high demand due to the economic times.

As rates go up, bonds tank. Rates will likely go up over the next several years and if that happens, anyone who buys bonds will be a sad camper.