Most investors will want some of their portfolio allocated to bonds.  Doing so has been shown lowers volatility and increases average returns over time.  Now is a dangerous time to be investing in bonds however.  Interest rates are a record lows.  And liquidity is drying up.

Liquidity: There are new capital requirements in most countries for banks to act as market makers for bonds.  Most banks have determined it no longer makes financial sense to remain in that line of business.  The result is widening bid-ask spreads.  At some point, we may see a liquidity crisis where there are simply no bids at all.  Prices will crash.  If you succumb to the herd mentality like a dumbo T.Rex and sell at that time, you will lock in losses.

There are two solutions.  One is to buy individual bonds (especially if you can scoop them up cheap during a liquidity event) and hold them until maturity.  The other is to let someone else buy and hold bonds to maturity for you.  Bond ETFs are not the place to do this.  If ETF holders are abandoning the ETF, the firm will be required to sell into the panic to meet redemptions.  Where you want to be is in a Closed End Fund (CEF).  These funds do not create and liquidate shares with demand.  Instead, there is a fixed amount of capital and the lot trades in the free market as a fixed number of shares.  Prices can go down (and present a bargain!) but the firm is not on the hook for outgoing cash and can thus hold to maturity.  Most bond CEFs also provide modest leverage around 30%.   I am currently invested in two CEF municipal bond interests (NIO and NEA) largely for this reason.

Devour your prey raptors!

Bond risk – use Closed End Funds (CEF)

Never miss another opportunity to devour prey!

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