There comes a time (or times) in everyone’s life when an individual must take stock of their given personal situation and make adjustments as necessary. For me one of times recently came when my wife and I had to address issues surrounding my daughter’s education (or lack thereof). During that same time I realized that, with regard to my investments, it is now much more important for me to not lose money than it is to make money – return of capital has become much more important to me than return on capital. That said, I began moving most, if not all, of my investment dollars into corporate bonds.
Now, I now there will be some people out there who will say that, by doing so, I will miss out on some great growth opportunities and, though that may be true, I am of the opinion that the global economy is in a deflationary period that is going to last for quite some time. With that thought in mind (and given the fact that I am now approaching my mid 50’s) I’m just not willing to take the risks with equities that I was once willing to take. Personally, I just don’t see many growth opportunities on the horizon. The U.S. is simply plodding along, China’s economy is slowing down and Europe – well, Europe, is a downright mess.
For me (and, maybe, for many other people), I believe the best way to get through this period of time will be though a safer and more conservative investment approach. As such, I have chosen to move monies out of stocks and into investment grade corporate bonds. The benefit of such a move is twofold. First, I will receive regular interest payments (whether monthly or semiannually) and, second, I stand a much better chance of recouping my original principal investment because of the way bonds are structured. Legally, bondholders are much higher up the pecking order when it comes to issues of default and bankruptcy. Simply put, bondholders stand a much better chance of being compensated (to some degree) when a company files for bankruptcy. In fact, shareholders/stockholders are the very last ones in line for any type of reimbursement during bankruptcy proceedings.
If you believe, as I do, that we are going to continue this rough patch for awhile – or if you simply want to diversify your portfolio – then investing in quality corporate bonds may be something you wish to consider. If so, then the next question you will need to ask yourself is: Which bonds or bond funds should I purchase? With regard to bond funds, fortunately there is a wide variety of funds from which to choose, and they come in several different flavors: Index, Actively Managed and Exchange Traded Funds or ETFs. When it comes to individual bonds, the selection is a little more spotty but bonds are available on the secondary market if you are willing to hunt for them.
The most well managed and least expensive corporate bond mutual funds and ETFs I have found, thus far, are the ones offered by Vanguard. With regard to individual corporate bonds, there are a couple of alternatives for retail investors. One way to find individual bonds (and, in my opinion the best way) is to screen for them on the secondary market with either one of the screeners provided by Fidelity and/or Vanguard. To use either of one the screeners, however, you will need to have an active account with the company whose screener you wish to use. Fortunately, though, accounts can be opened at either (or both) of the the brokerages with a relatively small initial investment. My personal favorite is Vanguard’s screener which I have used extensively lately to find some fairly decent investment opportunities.
For those of you who have brokerage accounts elsewhere and do not wish to open another account, you may find the free bond scanning tool at FINRA’s Web site useful. It does a fairly decent job of scanning for bonds, but to find those available for purchase you will need to be certain to enter a value in the “Activity” field.
In my next post I will cover some of the intricacies of screening for individual corporate bonds.
