Individual Bonds vs. Bond Funds: Which is Safer for Your Retirement Income?
Individual Bonds vs. Bond Funds: Which is Safer for Your Retirement Income?
CORE INSIGHTS
- Control vs. Convenience: Individual bonds guarantee a maturity date and principal return. Funds offer diversification but expose you to perpetual interest rate risk.
- The NAV Trap: In rising rate environments, Bond Funds lose value permanently if you sell. Individual bonds always return to “Par” ($100) at maturity. FINRA Alert
- Laddering Strategy: Building a “Bond Ladder” creates a predictable income stream that aligns with specific liability dates (e.g., paying off a mortgage).
For decades, the advice was “just buy BND (Total Bond Fund).” But the 2022 crash exposed a flaw: Bond Funds behave like stocks in the short term. To secure true safety of principal, sophisticated investors are turning back to the certainty of Individual Bonds.
[Image of ‘Pull to Par’ Chart showing bond price converging to $100 at maturity vs Fund price wandering]Why Individual Bonds Recover:
- Held-to-Maturity: Unless the issuer defaults, you receive Face Value at maturity regardless of market price fluctuations.
- Constant Duration Risk: Bond Funds maintain a fixed duration (e.g., 7 years). They sell bonds before maturity, crystallizing losses in a down market. Fabozzi, Fixed Income Analysis
What-If Scenario: Rates Rise by 1%
Situation: You hold $100,000 in 10-Year Bonds yielding 4%. Rates jump to 5%.
| Asset Holder | Market Price Impact | Action & Result |
|---|---|---|
| Individual Bond | Drops to ~$92k | Hold to Year 10. Receive full $100,000. Loss = $0. |
| Bond Fund | NAV drops to ~$92k | Manager Sells. Loss realized to buy new bonds. No guarantee to recover par. |
Visualizing the “Pull to Par”
*Figure 1: Price Trajectory. Individual Bonds (Green) always snap back to $100. Funds (Red) wander indefinitely.*
Strategic Action Steps
Do you need Total Return or Cash Flow? If you need $50k in 3 years for a house, buy an Individual Treasury matching that date.
Buy Treasuries maturing every year (2026, 2027, 2028). This “Rolling Maturity” averages out risk while guaranteeing liquidity.
Use “Defined-Maturity ETFs” (e.g., BulletShares). They trade like ETFs but liquidate and return cash at a specific date.
The Bottom Line: Who Should Choose What?
- Choose Individual Bonds: For retirees needing absolute certainty of cash flow dates.
- Choose Bond Funds: For young accumulators who want easy exposure and can ride out volatility.
Do bond funds have a maturity date?
No. They maintain a ‘constant duration’ by selling bonds before they mature. Therefore, there is no guaranteed date to get your principal back at par.
What is the NAV Trap?
In rising rate environments, a bond fund’s Net Asset Value (NAV) drops. Since the fund never matures, this loss can become permanent if you sell.
What is a BulletShares ETF?
It is a hybrid ‘Target Maturity’ ETF. It holds a basket of bonds that all mature in the same year, liquidating and returning cash like an individual bond.