How to Research and Buy Bonds
Simple Tips for Bond Investors
You don't have to be an investing expert to do your own bond research and buy the best bonds. All of the knowledge, terminology, and complexity involved with bond markets can be accessed and made simple with a handful of simple strategies and a few useful websites. There are bond analysts and credit agencies that do most of the work for you, so you only need to know where to look and how to interpret the information that already exists.
View the Ratings
Most of the hard part of researching bonds is done for you by three primary bond rating agencies: Standard and Poor's, Moody's, and Fitch. Much like people have credit reports that determine creditworthiness, institutions that issue bonds have ratings based on their ability to make interest payments and return the principal in full. The ratings are listed below:
|Moody's||Standard & Poor's||Fitch|
Study the Professionals
If you want to pick bonds like professional investors, pay close attention to what they pick. Start your bond research by taking a look at some portfolio holdings of some of the best bond mutual fund managers in the world. They have experience, generally good judgment, and teams of analysts to help them pick bonds for their portfolios.
Bill Gross is probably the best-known bond fund manager in the world. He managed the largest bond fund portfolio, PIMCO Total Return (PTTDX), and a few others, such as Harbor Bond (HRBDX). Dan Fuss, best known for managing Loomis Sayles Bond (LSBRX), has nearly 50 years of experience investing in bonds and is also a good person to follow. He's not a specialist, which means his knowledge is both deep and wide; he invests in almost every type of bond. Fuss can even dig into the high-yield (junk) area of the bond world, so his picks can give you some ideas many other managers won't provide.
Sites for Research
You'll find bond holdings information on most mutual fund research sites. For example, on Morningstar's website, you can type in the ticker symbol of a bond mutual fund, go to that fund's main information page, find the link to "Portfolio," then follow the link to "Holdings," where you'll find a list of the fund's top 25 bond holdings. There are also sites, such as Yahoo! Finance, where you can learn more about bonds and check prices before you make a purchase.
Common Mistakes to Avoid
One of the most common mistakes people make when investing in bonds is reaching for too much yield. Advanced and beginning investors can both make the mistake of researching and buying only high-yield bonds. Higher rates of interest are good, but these high yields come with default risk. Generally, the higher the yield, the higher the risk of default on the issuing institution. This is similar to an individual paying higher interest rates on borrowing; higher rates are applied to higher-risk borrowers. If all of your bonds are high-yield, you may earn more interest, but you may also lose your principal if the issuing entity declares bankruptcy and is unable to pay you back your initial investment.
Bond investors also make the mistake of overlapping similarities in maturities, bond types, or industry. If you have several different bonds in your bond portfolio, you may not be adequately diversified. Try to have differing maturities—like 1-year, 5-year, 10-year, 30-year—differing bond types, like Treasury, municipal, corporate, and high-yield, and differing industries among corporate bonds, such as financial, health, manufacturing, and retail.
Also, be sure to shop around until you find the best price. Bonds have markup prices, which means there are broker commissions built into the price. However, it is not mandatory that you pay the full markup, the prices are somewhat negotiable. A bond that is being sold for $1,010 from one broker may be able to be bought for $995 from another broker. Try not to pay more than the most recently traded price.
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