Individual Bonds vs. Bond Funds?
Should you buy individual bonds or stick with bond funds?
Transcript:
Today I’m stepping into one of the most debated topics in personal finance.
Nope, not Trump Tariffs.
Not gold.
Not even crypto.
I’m talking about… individual bonds vs. bond funds.
And believe it or not, this topic sparks more discussion than almost anything else—okay, maybe not more than Bitcoin.
Don’t believe me? Just check out the forums on Bogleheads—dozens of threads debating bond ladders and fund strategies.
Why People Like Individual Bonds
Let’s start with why some investors prefer individual bonds—especially laddered strategies.
When you buy a bond, you're essentially lending money—typically to the government or a company. In return, you receive regular interest payments, and your principal is returned at maturity.
U.S. government bonds, in particular, are viewed by economists as the benchmark for the 'risk-free rate'—not because they’re free from all risk, but because they carry very low credit or default risk.
However, they can still fluctuate in price and be impacted by inflation or interest rate changes.
The appeal of individual bonds is predictability. You know your interest rate, and you know when you’ll get your money back—1 year, 5 years, 10 years down the road.
If your goal is to match a specific expense on a specific date, this kind of setup can be helpful.
Some investors build what’s called a bond ladder—a series of bonds that mature at regular intervals over time.
It’s a structured way to spread out risk and create a stream of maturing assets. But, here’s where it gets tricky.
The idea of matching your income needs perfectly with your bond maturity dates—called duration matching—sounds great in theory. But life isn’t that tidy.
A medical expense comes up. Your car breaks down. You decide to take an unplanned trip. Or you give generously beyond your original budget.
These things can throw off your entire matching strategy.”
Why I Often Prefer Bond Funds
Let’s shift to bond funds. What exactly are they?
They’re professionally managed portfolios that hold dozens, sometimes thousands, of individual bonds. You get diversification in one package.
Yes—bond funds fluctuate in value. But so do individual bonds if you need to sell them before maturity.
And unless you know the exact date you’ll need that cash, there’s always a chance you’ll be selling at the market price—not par value (also known as face value – the stated value of the bond when it was issued).
Let’s say you retire and build a bond ladder that goes out 20 years, with one bond maturing each year. What happens if you live beyond 20 years? You’ll need to reinvest the proceeds and could be exposed to interest rate changes – lower rates when you go to re-invest.
Or what if you pass away in year 14? Your heirs may have to sell the remaining bonds on the secondary market—which may or may not be favorable at the time.”
So while individual bonds offer structure, they also require precision. And for many retirees, that precision isn’t realistic over 20–30 years.
That’s one reason why I personally lean toward bond funds—they offer flexibility, broad exposure, and professional management, often at a low cost.
(Especially for index-based funds.)
Now, I’m not recommending a specific product here. But if you'd like a second opinion on your bond strategy, we’d be happy to review your portfolio.”
SUMMARY
In some cases—like when you have a clearly defined liability on a fixed date—individual bonds or CDs can make a lot of sense.
But for most retirees, trying to match every future expense with a maturing bond? That’s pretty challenging.
That’s why I often prefer bond funds.
They hold individual bonds, they’re easy to manage, and they may offer a more flexible solution for many retirement strategies.
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