ANALYST: Here's Why It's A Terrible Idea To Buy Individual Bonds Over Bonds Funds

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The Fallacy Of Buying Individual Bonds Over Bond Funds (Morningstar)

Many investors think they will be protected in the event of interest-rate rises if they buy individual bonds (and hold them to maturity) over bond funds. But Sam Lee, a strategist and editor of Morningstar ETFInvestor, thinks this is “absolutely false”:

“If you buy an individual bond and interest rates rise, the market price of that bond will fall. And just because you ignore the market price doesn’t change that fact. When you invest in a bond when interest rates are low, you basically have locked in a stream of payments at that low interest rate. When interest rates rise, you can now actually get same stream of payments for a lower price. So, basically you’ve lost the opportunity to invest in higher-yielding assets.

“And another way to think about this is with mutual funds. It’s actually kind of fishy when you think about it that [people think] if you hold the bond in your personal account and you completely ignore its price, that somehow you’re protected from interest-rate risk but that if you put it into a bond fund, suddenly interest-rate risk is all over the place and you are suddenly no longer safe. But that’s also another fallacy because nothing changes about the future cash flows of a bond when you stick it in a mutual fund.”

Advisors That Want To Add Value Should Develop An Expertise (The Wall Street Journal)

The most important things an adviser can do are: develop a niche, understand their own limits and learn to delegate, writes Dave Polstra of Atlanta-based Brightworth in a new Wall Street Journal column:

“One of the greatest challenges in my early work with executives was navigating the complexities of their benefit plans. These people had executive stock options, non-qualified options, appreciated securities inside of their 401(k)–all kinds of deferred compensation issues that are unique to executives. Those can be hard for anyone to get their head around. But in time, I built my base of knowledge and developed an expertise that was specific to these employees and their company.

“…We’re well-versed in the different payout options of their supplemental pensions, for example. We know about the stock options that vest only after an executive reaches a certain age. Those are significant details that most other advisers wouldn’t be aware of and it’s the kind of comprehensive knowledge that sets us apart as professionals.”

It Looks Like The US Markets Are Returning To Normal (Guggenheim Partners)

Historically, rising equity prices have been associated with falling bond prices. But in the last few years they have been moving together “as both markets were inflated by floods of liquidity from accommodative U.S. monetary policy, which distorted the traditional relationship,” writes Guggenheim Partners’ Scott Minerd. Since the Fed first mentioned tapering its asset purchase program, however, “markets began returning to more normal correlations, driven not by expectations of continued quantitative easing, but by the economic outlook.”

Some Wonder If The Sec Has Taken On More Than It Can Handle (Investment News)

The SEC has recently announced a bunch of reforms, but many are asking if the regulators can keep up, writes Mark Schoeff at Investment News. The SEC had been looking for a $US353 million increase from fiscal 2013, but ended up with just a $US29 million increase. While some think the SEC has been communicative, others like Brian Hamburger, president of MarketCounsel, think “there’s been a huge gap between what the SEC says is important and where they choose to devote their resources.”

Here’s A Look At Each Year’s Big Stock Market Sell-Off Since 1980 (JP Morgan Funds)

After hitting an all-time high of 1,850 on January 15, the S&P 500 hit a low of 1,737 this week. We’ve seen a 6.1% intra-year decline. JP Morgan Funds’ David Kelly has a chart on the average larges annual intra-year declines since 1980. He finds that despite average intra-year drops of 14.4% annual returns in those years have been positive 26 out of 34 times.

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