The safest choice of bond investment for your portfolio is Treasury bonds (and inflation-protected Treasuries). Only rarely do Treasuries offer the fixed-income world excitingly large returns. But their issuer — Uncle Sam — won’t be going bankrupt. In troubled times, that is an important consideration.
Here are the best ways to buy Treasury bonds:
1. The U.S. Department of the Treasury has Web site called TreasuryDirect that allows for the purchase of Treasurys. It’s easily accessible to individual investors, and Treasuries can be bought at auction at no fee.
2. Mutual funds. There aren’t many Treasuries-only mutual funds. However, some exchange-traded funds have emerged that are modeled on Treasury indexes. Exchange-traded funds, or ETFs, are essentially baskets of actual securities that are broken into pieces for individual investors to buy. ETFs offer low fees and have certain tax advantages.
3. Government bond funds. The most common Treasury proxy is the ubiquitous “government bond fund,” which usually includes Treasuries, highly rated agency debt (for example, from the Federal Home Loan Bank, Ginnie Mae and so on) and even some short-term corporate bonds. Vanguard, T. Rowe Price and PIMCO offer government funds of various durations with excellent track records. Just watch the entry costs and ongoing fees whenever you buy into a fund.
Why Buy Into A Fund?
The primary advantage of these funds is that they simplify your investment. Writing a check to a fund company takes less effort than buying individual bonds and can, for some investors, be worth a small annual fee.
Many financial planners criticize government-bond funds, though, because few bond funds feature a single maturity date. Most managers buy and sell to take profits or pounce on perceived bargains. This means that there is no way to guarantee the return of your capital in full on any precise date – one of the key reasons for buying bonds in the first place.
The only way to totally guarantee the stability of the principal is to buy individual bonds at issue and hold them to maturity.