Individual corporate bonds vs bond fund

wmb194

Thrugelmir said:

assetallocator said:

wmb194 said:

The advantage of using a fund in this area is that the professional fund managers are often better at navigating the minefield.

unlike buying a ladder of individual bonds which will mature over time.

Liquidity is extremely low in many bond stocks. In addition you may struggle to trade in small quantities. Market makers that service retail platforms are unlikely to be any holding stock. 

Every bond listed on ORB, where you find the ones we've been talking about, is supposed to have, IIRC, at least three market makers and it's designed to be friendly to small holders. IIRC the minimum trade size is usually £500. I've never had any issues buying or selling even the more obscure ones. The only thing is that the bid/offer spreads can be quite wide on the bonds with small issue sizes.

The key issue with ORB these days is that there's not a lot to choose from and new issues are rare.

chucknorris

wmb194 said:

chucknorris said:

wmb194 said:

I stayed away from Wasps when it issued as it looked like a loss making, weak company dependent on a single rich benefactor, rugby isn't known for making much money and the value of its security (the stadium) is quite speculative.

So did I, but I thought that they were exceptional value when the price became more realistic. I invested at an average price of 59 pence, which gave an overall interest return of about 10% (I started investing at about 85 pence) and a potential tax free capital gains windfall, well worthy the risk I thought at the time, and I still do (but maybe not at the current price).

Yes, I know, I read your previous posts. but it's still a speculative investment in a weak company. Take a look at its most recent accounts: https://find-and-update.company-information.service.gov.uk/company/04187289/filing-history

I'm not saying you shouldn't invest in these sorts of things just that at these yields in this low yield environment you're not talking low risk and you need to know what you're getting into. The advantage of using a fund in this area is that the professional fund managers are often better at navigating the minefield.

Oh I know it was a miles high risk (I was fully aware of Wasp's position), but I honestly thought that I correctly appraised it, and I thought that the reward was much higher than the risk (so exceptional value), I only invested about 5% of my portfolio (still a significant well over 6 figure sum, but it would not have hurt me, and it was secured on the stadium, so never was a zero return).

The only reason that I wouldn't do that again is not because it wasn't value, it was! But because I can't really spend the gain, because I already have more than I can possibly spend before I die (and I have no children). So I should be avoiding risk and be more defensive, but I seem to be struggling to accept being that way, but I am trying. It was an exceptional opportunity that I just couldn't refuse, that's how I made my money in the first place, but I accept that I need to stop taking on risk. Because it isn't value if you don't need the gain.

JohnWinder

You’re distinguishing between bond funds and bond ladders, but for most clarity you need to recognise there are rolling bond ladders and non-rolling bond ladders. I think you’re talking about the non-rolling; a bunch of bonds that mature just when you want them to, probably at different times, when you cash them in.  The rolling bond ladder continually replaces maturing bonds with new bonds that will mature into the future. A bond fund is a type of rolling bond ladder.

I've read somewhere that holding an index fund over its duration is equivalent to holding the average bond holdings to maturity, but to be honest I've never been able to get my head around that.

I suppose that’s right, but most of the bond funds you’ll consider have an unchanging duration, so they suffer the disadvantage that you can’t hold them to maturity (unlike individual bonds in a non-rolling ladder) because the bond fund never ‘matures’ as it’s always holding bonds that on average mature in 4, 6, maybe 15 years time. As each x year bond in the fund comes to maturity, the manager replaces it with another new x year bond.

A bond fund might have over 100 holdings, but what sort of number would be needed to have enough diversification?

I doubt anyone can quantify that for you, but you’d have to imagine that the more bonds you have the safer it becomes through diversification. When they’re out of luck, corporate bond holders can get next to nothing back if the company folds. Do you think that particular bond should be one out of the twenty in your bond portfolio, or should it be one out of several hundred?

assetallocator

JohnWinder said:

A bond fund might have over 100 holdings, but what sort of number would be needed to have enough diversification?

I doubt anyone can quantify that for you, but you’d have to imagine that the more bonds you have the safer it becomes through diversification. When they’re out of luck, corporate bond holders can get next to nothing back if the company folds. Do you think that particular bond should be one out of the twenty in your bond portfolio, or should it be one out of several hundred?

I suppose that's the strongest argument against holding individual corporate bonds - it's simply impractical to get enough diversification.

Notepad_Phil

chucknorris said:

wmb194 said:

chucknorris said:

wmb194 said:

I stayed away from Wasps when it issued as it looked like a loss making, weak company dependent on a single rich benefactor, rugby isn't known for making much money and the value of its security (the stadium) is quite speculative.

So did I, but I thought that they were exceptional value when the price became more realistic. I invested at an average price of 59 pence, which gave an overall interest return of about 10% (I started investing at about 85 pence) and a potential tax free capital gains windfall, well worthy the risk I thought at the time, and I still do (but maybe not at the current price).

Yes, I know, I read your previous posts. but it's still a speculative investment in a weak company. Take a look at its most recent accounts: https://find-and-update.company-information.service.gov.uk/company/04187289/filing-history

I'm not saying you shouldn't invest in these sorts of things just that at these yields in this low yield environment you're not talking low risk and you need to know what you're getting into. The advantage of using a fund in this area is that the professional fund managers are often better at navigating the minefield.

Oh I know it was a miles high risk (I was fully aware of Wasp's position), but I honestly thought that I correctly appraised it, and I thought that the reward was much higher than the risk (so exceptional value), I only invested about 0.5% of my portfolio (still a significant well over 6 figure sum, but it would not have hurt me, and it was secured on the stadium, so never was a zero return).

The only reason that I wouldn't do that again is not because it wasn't value, it was! But because I can't really spend the gain, because I already have more than I can possibly spend before I die (and I have no children). So I should be avoiding risk and be more defensive, but I seem to be struggling to accept being that way, but I am trying. It was an exceptional opportunity that I just couldn't refuse, that's how I made my money in the first place, but I accept that I need to stop taking on risk. Because it isn't value if you don't need the gain.

It sounds as though you enjoy doing the research on these opportunities, so maybe allocate a small percentage of your assets to 'having fun with your money' investments and use them as something like hobby money. You'll just need to ensure that you don't get tempted to dip into the rest of your assets, but going completely cold turkey on something you seem to enjoy is not something that I would want to do.

chucknorris

Notepad_Phil said:

chucknorris said:

wmb194 said:

chucknorris said:

wmb194 said:

I stayed away from Wasps when it issued as it looked like a loss making, weak company dependent on a single rich benefactor, rugby isn't known for making much money and the value of its security (the stadium) is quite speculative.

So did I, but I thought that they were exceptional value when the price became more realistic. I invested at an average price of 59 pence, which gave an overall interest return of about 10% (I started investing at about 85 pence) and a potential tax free capital gains windfall, well worthy the risk I thought at the time, and I still do (but maybe not at the current price).

Yes, I know, I read your previous posts. but it's still a speculative investment in a weak company. Take a look at its most recent accounts: https://find-and-update.company-information.service.gov.uk/company/04187289/filing-history

I'm not saying you shouldn't invest in these sorts of things just that at these yields in this low yield environment you're not talking low risk and you need to know what you're getting into. The advantage of using a fund in this area is that the professional fund managers are often better at navigating the minefield.

Oh I know it was a miles high risk (I was fully aware of Wasp's position), but I honestly thought that I correctly appraised it, and I thought that the reward was much higher than the risk (so exceptional value), I only invested about 0.5% of my portfolio (still a significant well over 6 figure sum, but it would not have hurt me, and it was secured on the stadium, so never was a zero return).

The only reason that I wouldn't do that again is not because it wasn't value, it was! But because I can't really spend the gain, because I already have more than I can possibly spend before I die (and I have no children). So I should be avoiding risk and be more defensive, but I seem to be struggling to accept being that way, but I am trying. It was an exceptional opportunity that I just couldn't refuse, that's how I made my money in the first place, but I accept that I need to stop taking on risk. Because it isn't value if you don't need the gain.

It sounds as though you enjoy doing the research on these opportunities, so maybe allocate a small percentage of your assets to 'having fun with your money' investments and use them as something like hobby money. You'll just need to ensure that you don't get tempted to dip into the rest of your assets, but going completely cold turkey on something you seem to enjoy is not something that I would want to do.

I do enjoy that actually, so you are probably right.

masonic

Agree, there are two approaches to dealing with "excess assets". Either you use them to reduce the overall risk you take on such that it is the minimum to meet your objectives, or you ringfence what you could possibly need in a sensible investment strategy, then dial the risk right up with the excess - since you can afford to take on as much risk as you like. Ultimately it seems like you will be leaving money behind, so perhaps you can speculate on investments that can make a difference in a way that is meaningful for you. You may get more value in your latter years from seeing something you supported flourish than simple numbers in a spreadsheet.