Investing in Bonds For Dummies
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Obviously, you want to look at any prospective bond fund's performance vis a vis its peers. If you are examining index funds, the driving force behind returns will be the fund's operating expenses. Intermediate-term Treasury bond index fund X will generally do better than intermediate-term Treasury bond index fund Y if less of the profits are eaten up by operating expenses.

With actively managed funds . . . guess what? Operating expenses are also a driving force. One study conducted by Morningstar, reported in The Wall Street Journal, looked at high quality, taxable bond funds available to all investors with minimums of less than $10,000. More than half of those funds charge investors 1 percent or more. Not surprisingly, almost three-quarters of those pricier funds showed performance that was in the bottom half of the category for the previous year.

Russell's rule: Don't pay more than 1 percent a year for any bond fund unless you have a great reason. And don't invest in any actively managed bond fund that hasn't outperformed its peers — and any proper and appropriate benchmarks — for at least several years. ("Proper and appropriate benchmarks," refers to bond indexes that most closely match the composition of the bond fund in question. A high-yield bond fund, given that you can expect more volatility, should produce higher yields than, say, a Treasury index. Any comparison of a high-yield fund's return to a Treasury index is practically moot.)

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Russell Wild is a NAPFA certified financial advisor and principal of Global Portfolios, an investment advisory firm based in Allentown, PA that works with clients of both substantial and modest means. He has written two dozen books and numerous articles on financial matters.

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