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The Evolution of Bonds and Bond Mutual Fund Products

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Though written by me in 1982, the following still holds true today.

When I think of bonds, I think of simple and safe; reasonable income and protected capital; not artificial/contrived income and capital @ risk.

'Options', 'futures,' 'hedging,' 'enhancements,' and 'leverage' are now creeping into the lexicon of 'simple and safe' bond portfolio management strategies.

It has always been true in the financial markets that the farther one strays from core investments, in this case from individual bonds to bond mutual funds, there is always increased investment risk and never investment value added for the investor.

If specialists deal with one market variable, how can one person, or even a team, deal with and correctly anticipate a multiplicity of variables to outperform a single variable product; in this case, bonds.

I have yet to meet an expert who can correctly anticipate one of these variables all of the time, let alone all of them all of the time.

An error of any size in just one will offset the correct anticipation of the other variables.

You don't need the headache, keep sight of the goal; safe and secure principal and competitive income.

Take a moment and consider the evolution of bonds and bond mutual fund products which has been and is taking place:

  • Bonds
  • US Government bonds
  • Secured US Government bonds
  • Insured, secured US Government bonds
  • Short term insured US Government bonds
  • Short term insured corporate bonds
  • Short term insured, secured corporate bond fund
  • Short term insured, secured, managed corporate bond fund
  • Long term, insured, secured, managed corporate bond fund
  • Long & short term, insured, secured, managed corporate bond fund
  • Domestic long & short term insured, secured, managed corporate & government bond fund
  • Domestic long & short term, insured & uninsured, secured & managed, corporate & government bond fund
  • Domestic long & short term, option writing, insured & uninsured, secured, managed corporate & government bond fund
  • Domestic long & short term, option writing, insured & uninsured, secured, managed corporate, government bond & junk bond fund
  • Closed end domestic long & short term, option writing, insured & uninsured, secured managed corporate, government bond, junk bond
  • Closed end domestic & foreign, currency risk, long & short term, option writing, insured & uninsured, secured, managed corporate, government bond, junk bond fund
  • Closed end domestic, foreign multinational, currency risk, long & short term, option writing, insured & uninsured, secured, managed corporate, government bond, junk bond fund
  • The Ultimate Fund: Listed, managed, closed end, domestic, multinational, foreign, option writing, currency risk, long & short term, insured & uninsured, secured & unsecured, managed and unmanaged, corporate bond, government bond, junk bond, & municipal bond balanced, lotto, Kentucky Derby, Las Vegas keno, Contrarian vs. Contrary diversified bond fund.

In brief, investors will always be better served owning individual bonds rather than a bond mutual fund.

Given a knowledge and understanding of bonds and responsible bond portfolio selection and management disciplines rules, and procedures, investors never would, never should invest in bond mutual funds.