Some time ago an article appeared in
the Los Angeles
Times, titled "Individual Investors Are Fleeing Bonds, but Should
While it made no specific recommendations, it did highlight the
total returns on various bond types. Included were long term Treasury
which had a return (price appreciation plus interest) of +15.3%.
Real Vs Paper
Now 15.3% is obviously a great return on
but what does it
really mean? Unless you are a bond trader who plays the market
gains, it merely means that you have a handsome paper gain so far this
year. For the income investor it means little or nothing.
cash out to realize the capital gain, you become a bond trader
and that is not why you bought the bonds in the first place.
bond prices are high, yields are low so the long term bond investor
has no good reinvestment alternatives.
When to Buy
Unlike most equities whose value
increases with time,
the market value of a bond merely fluctuates about some average value
depends on the current interest rate and the time to maturity. In
the case of a bond fund, which maintains a relatively constant average
maturity, the market value reflects only the current interest rate for
The buy-and-hold bond investor foregoes
higher return on equities in favor of a predictable return. If
is to hold to maturity, as is the case for many investors, handsome
gains means nothing. The yield-to-maturity is essentially the
The decision to buy should be based only on whether the
is attractive at the time of purchase.
Bond Funds vs
The bond fund investor faces a less
There is no date-certain market value for the investment as in the case
of bonds. That's because the fund continually replaces its bonds
its advertised average maturity.
If you plan to buy a bond fund you
should look for a current
yield somewhat higher than the long term average yield-to-maturity on
maturity bonds. In this way you gain some protection against a
loss due to a change in market interest rates. Favorable
a bond fund don't happen very often, and part of the reason is
fund expenses often soak up too much of the interest earnings.
to Long Bonds
While equity investments can sustain an
return over an extended period, the total return on a bond fund can
fluctuate about some long term average that is approximated by the
rate yield, less fund expenses. Long maturity bonds or bond funds
are seldom a good choice for the buy-and-hold investor.