Diversifying with bond funds isn’t the easiest thing in the world. Many bond funds have minimums, often in the $1,000 to $10,000 range. And exchange-traded funds, even though they have no minimums, often carry trading fees. In other words, if you haven’t got a fair chunk of change, building a diversified bond portfolio can be a challenge.
Most individual bonds sell for $1,000. But buying individual bonds (not Treasuries, but most other bonds) means paying a broker, and that can be very expensive. You can’t very well build a diversified bond portfolio — different maturities, different issuers — out of individual bonds unless you have quite a few grand sitting around. But here are a few suggestions for all you non-millionaires.
Keep it simple with balanced funds (for people with under $5,000)
If you have under $5,000 to invest, you are going to find little choice if you want a balanced portfolio. Forget about individual stocks and bonds. Even building a fund portfolio, given the minimums of most funds, will be tough.
Best solution: Consider a balanced fund, a one-stop-shopping fund that allows you to invest in stocks and bonds in one fell swoop. Some balanced funds are static; they allocate, say, 60 percent of your money to stocks and 40 percent to bonds, and that is how it will always be.
Others are dynamic; these are often called life cycle funds. A life cycle fund has a target retirement date and, as you move toward that date, the fund shifts your money, usually from the stock side to the bond side, to become more conservative.
Move beyond the basic (for people with $5,000 to $10,000)
In the ballpark of $5,000 to $10,000, you may be looking to invest several thousand in stocks and several thousand in bonds. Your best bet for building a diversified portfolio would be a handful of low-cost, no-load mutual funds or exchange-traded funds. Perhaps you want one total market bond fund, one total U.S. stock fund, and one diversified foreign stock fund.
Branch out (with $10,000 or more)
When you pass the $10,000 mark, you can begin to entertain a more finely segmented portfolio of either mutual funds or exchange-traded funds. But you’ll probably want more than $10,000 in the bond side of your portfolio before you sell your total market bond fund and start diversifying into the various sectors of the bond market.
It’s probably not a good idea to start dabbling in individual bonds unless you have a bond portfolio of $300,000 or so. Otherwise, the trading costs will eat you alive. The exception would be Treasury bonds because you can buy them at