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September 01, 2007

Investing in Bond Funds

Posted in: Retirement Investing

Investing in bond funds is not one of my particular favorites, due to the traditionally lower rates of return vs other investments, however, it does serve a purpose. Typically, bond funds have lower risk, and therefore become more attractive as people age, and become more protective of their money. Let’s look at some typical indicators to be aware of when evaluating bond funds:

  • Return
    Of course, return is what we are most interested in. But bond funds, like other funds, usually show an annualized rate of return averaged over a 1 year, 3 year, 5 year, 10 year, and since inception date. I pay most of my attention to the rate of return since inception. I like to know through the good times and the bad, how a particular fund averages out. So when I am evaluating different bond funds, the most important factor is the return since inception.
  • Inception Date
    As previously stated, the return since inception is most important to me, but it carries less weight if a fund has only been around for say, 6 months vs 10 years. I like to see a fund that has at least been around long enough to see a recession, and an expansion in the economy. Generally speaking, if a fund has been around at least 5 years, it probably has seen down and up markets.
  • Domestic or Foreign
    I will look at foreign stock funds, but not foreign bond funds. To me, if I am going to see less return due to investing in bond funds vs investing in stock funds, I am definitely not going to bear the load of increased risk due to foreign governments or foreign companies and their bond funds. I will stick to US bond funds only.

I have to be honest here, this is about all that has any importance to me when investing in bond funds. I don’t really care about the bond yield, because it is just a current snapshot of what a particular bond fund is doing. I want to know that the fund manager is making good decisions over time, and creating a quality average rate of return. Let me know what you think by leaving a comment or question below. Am I not looking closely enough at these funds? What would you do differently?

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