Deudas. En esta categoría escribe todos los pagos de deudas y préstamos que estás haciendo

bonds that trade in the U.S. (Mostly U.S. corporate bonds, but also includes foreign issuers.)

iShares Lehman U.S. Same as in CFT, 0.2% 0.04% 5.23% Intermediate but only maturities

Credit Index (CIU) ranging from 1–10 years.

Investment-Grade Bond Mutual Funds

It can be difficult for small investors to buy individual bonds. As a result, for most investors, the best way to access the bond market is through ETFs or bond mutual funds. However, before you decide whether to invest in a bond mutual fund, you need to keep in mind the important difference between owning individual bonds and owning a bond mutual fund: Individual bonds have maturity dates at which you are assured of having your principal of $1,000 per bond returned to you. The implication for safety-minded investors is that even if interest rates move against you, if you are willing to hold your individual bond

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until maturity, you know what the stream of interest income will be, in addition to knowing when you will get your principal back.

In contrast, bond funds do not have a maturity date, and as a result, there is never any point in time at which you are assured of having your principal returned. Nor can you predict the level of bond interest income that the bond fund will distribute. The reason is that whenever cash becomes available in a bond fund as the result of interest income or the maturation of some of the bonds in the fund’s portfolio, the fund manager will re-invest this cash in new holdings that he will purchase under whatever market conditions are prevailing.

From the perspective of maintaining a diversified long-term investment program, the lack of a single maturity date for bond funds should not deter you from using them. However, conserva- tive investors looking for a predictable level of income with which to meet living expenses might be better off with individual bonds if they have sufficient capital to build a diversified portfolio in order to avoid too much exposure to the risks of any single bond issuer (besides the federal government).

Compared to almost all open-end bond mutual funds, ETFs have the advantages of low costs. In the investment-grade bond world, lower-fund costs have almost always translated into higher returns for the investor. However, there are transaction costs involved in buying and selling ETFs, so some of you might be better off dealing directly with a bond mutual fund that would not charge you anything to place your own transactions. For example, if you anticipate transferring an amount from every paycheck into a bond investment, a bond mutual fund would be the best option.

The average expense ratio for an investment-grade bond mutual fund is approximately 1%/year, which is high relative to the current investment grade bond yield of 5.7% (yield to maturity of the Lehman Aggregate Bond Index as of 6/29/2007). In addition,

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although a no-load bond fund would not charge an investor for buying or selling shares, the fund itself bears the transaction costs of buying and selling bonds for the fund’s portfolio.

Most bond fund managers do not add enough value to make up the burden of this expense. In fact, the only bond manager who has performed well enough to overcome a 0.9% expense ratio has been Bill Gross in his Pimco Total Return Fund, class A, and his per- formance has been exceptional enough to make him a billionaire. The majority of investment-grade bond mutual funds have not matched the performance of the U.S. investment-grade bond benchmark (the Lehman Aggregate Bond Index) when both risk and profit are taken into account. As a result, there are only a small number of superior intermediate-term investment-grade bond mutual funds. All of them that we would recommend (aside from Pimco Total Return A) have expenses of 0.62%/year or lower.

You should never pay a sales load or buy mutual fund shares with deferred sales charges (so-called class B shares) in an investment- grade bond fund. Nor should you purchase class C shares in an investment-grade bond fund. (Class C shares, like class B shares, have built-in charges of 0.75%/year or more above the fund’s usual expenses. These extra charges, called 12(b)-1 fees, reduce your return and are paid to the broker who sold you the fund.) No fund manager has been able to perform well enough to justify incurring the burden of these sales commissions.

There are, however, a small number of bond funds whose managers have consistently stood out from the pack over the long term. If you are inclined to buy and hold your bond investments rather than following the interest rate trend model that we recommend, you can avail yourself of some of our favorite investment-grade bond funds that are listed in Table 6.5. These fund managers have succeeded either in earning average returns with below-average risk, or taking average risks while earning above-average returns net of expenses.

ptg TABLE 6.5 Recommended Investment-Grade Bond Mutual Funds

Mutual Fund Ticker Symbol Comment

Dodge and Cox Income DODIX Excellent long-term balance between risk and reward. Pimco Total Return PTTRX High historical long-term returns compared to other investment-grade bond funds. Buy only the institu- tional class of shares or the class A shares without paying the 3.75% sales load (available through some discount brokerage platforms). FPA New Income FPNIX Historically lowest risk of

the funds in Table 6.5. Vanguard Intermediate- VFICX Lowest expenses of the Term Investment Grade funds here, resulting in

more income distributed to shareholders.

Conclusion

This chapter has covered three important concepts about investment- grade bonds that you should keep in mind when you are evaluating a bond investment—interest rate risk, time until maturity, and yield to maturity. All bonds (except for money market funds) have interest rate risk. When interest rates rise, the value of existing bonds and bond mutual funds falls. Conversely, when interest rates fall, the value of existing bonds and bond mutual funds rise. The longer the term of the bond, the greater the level of interest rate risk. Short-term bonds (three years or less until maturity) have very little interest rate risk, while long- term bonds (over 10 years until maturity) have high interest rate risk. For most individuals, bonds maturing in 7–10 years offer the best balance between the amount of interest and the amount of risk.

If you buy an individual bond that matures in 10 years, as its maturity date approaches, the level of interest rate risk on your bond

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shrinks. In contrast, bond mutual funds and ETFs have a portfolio of many bonds that mature at different times, and any time the fund receives cash (from a new investor or from coupon payments on its holdings), it will reinvest in new bonds. As a result, a bond fund or ETF has no maturity date, and the level of interest rate risk should remain fairly constant as long as the fund manager does not change the character of the fund’s portfolio.

The yield to maturity (sometimes also reported as the “SEC Yield”) is the single most important piece of information about the projected return of your bond investment. In the case of an individual bond, the yield to maturity tells you what your return will be if you hold the bond until its maturity date. In the case of a bond mutual fund, the fund portfolio’s yield to maturity is an average of the yields for all the underlying bonds. It tells you what your bond fund would return to you if bond market conditions were to remain constant. Because bond market conditions do fluctuate, and since there is no single maturity date for a bond fund, the yield to maturity of your bond fund or bond ETF will change as bond market conditions evolve.

If you are concerned about the risks of a jump in interest rates, you should implement the risk-management strategy described here based on trends in the yield on 7-year Treasury notes. If yields are higher than they were six months ago, the interest rate environment is unfavorable for bonds (rates are rising), and you should be in a money market or a short-term bond fund. On the other hand, if the yields on 7-year Treasury notes are lower than they were six months ago, the interest rate environment is favorable for bonds, and you should be in an intermediate-term bond fund or ETF.

The best place to follow this strategy would be in a retirement plan that has no transaction costs, if such a plan is available to you and if it offers both intermediate-term investment-grade bond funds and a money market or short-term bond option. Otherwise, you can utilize the broadest bond market ETF (AGG) in a discount brokerage account.

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However, if you are not comfortable tracking interest rates and moving around your bond investments, you would be best off in one or more of the exceptional investment-grade bond funds listed in Table 6.5.

As of this writing (November 2007), the interest rates available on investment-grade bonds are relatively low. In the next chapter, you will learn about other bond investments that have different risks and that, under some conditions, could improve your investment results compared to what you would achieve by limiting yourself to conven- tional, investment-grade bonds.

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Special Bond Market Investment