One of the most frequent questions fixed-income investors ask is whether it is better to buy individual bonds or invest in a bond fund. While the answer may not be the same for everyone, buying individual municipal bonds offers two valuable, reliable benefits that most investments lack: predictability and near certainty.
When buying individual investment-grade municipal bonds, not only are you reasonably certain you will have your entire principal returned to you at a certain date, but you are also able to reliably predict your income and thus gain full control of when your entire investment will be available to you at maturity. The upside to holding your own bonds to maturity is that you are neutralizing interest rate risk, no matter what the rates do. While holding your individual bonds, the value fluctuations do not change your principal or interest payments.
In a well-thought-out portfolio, bond maturities can be staggered, called laddering. As one bond matures, you reinvest the principal into a new bond after the last maturity in the ladder. By carefully staggering bond maturities, you not only gain the ability to manage large expenses as they arise but also maintain greater flexibility in deploying your capital as your financial needs evolve. This approach helps ensure your investments continue to serve your changing goals over time.
Individual bond investing may not be suitable for every investor, particularly given the typical minimum investment of $10,000 or more. However, for those able to meet this threshold, the predictability, control, and flexibility it offers make it a compelling option for building a resilient fixed-income portfolio.
