Researching and trading stocks online became common in the long bull market. During the bond rally of the last three years, a small group of do-it-yourself investors has begun to assemble portfolios of bonds bought online.
Online bond trading remains cumbersome, partly because information about bonds is harder to find on the Internet than data about stocks. And unless investors restrict their online purchases to Treasury and Ginnie Mae issues, which are backed by the government, they will need to devote a lot of time to monitoring their portfolios, many advisers caution.
Numbers for the entire industry are not available, but Charles Schwab & Co, the big discount broker, says its clients now average 10,000 online bond trades a month, up from 1,000 in August 2000, when it began to offer the service. By contrast, Schwab clients made 143,990 trades of stocks or mutual funds online on an average day in March, the company said.
Other companies offering bonds online include the eTrade Group, Fidelity Investments, TD Waterhouse and Vanguard Brokerage Services. Investors can also turn to TreasuryDirect.gov to buy newly issued Treasury bills, notes and savings bonds from the government, and to www.internotes.com, owned by Incapital, and www.direct-notes.com, a unit of LaSalle Funding, to buy newly issued corporate bonds.
Brokerage firms began offering online bond trading as an outgrowth of online trading over the last four years among dealers and large institutional investors.
The shift toward electronic trading platforms has allowed individual investors to see thousands of prices in a more timely way, said Sang Lee, an analyst at Celent Communications, a financial services industry consulting firm based in Boston.
"There is a lot more transparency," he said.
Still, Web pages for bonds are more difficult to navigate than those devoted to stocks, partly because the bond sites are relatively new and not yet fully refined, and partly because of the nature of bonds. Unlike stocks, bonds do not have ticker symbols. To find bonds, search engines use the name of the issuer as well as the bond's maturity, coupon, rating and other criteria.
At some sites, not all bond trades can be made online. At Vanguard's site, for example, customers can research corporate bonds online but must call to execute an order; Treasury issues, however, may be bought online.
Investors who buy in bulk can get better yields. For example, at 1:30pm on Friday an investor on Schwab.com seeking to buy just one AAA-rated bond from GE Capital, due on Jan. 19, 2010, with a coupon of 7.375 percent, would receive a yield to maturity of 2.689 percent; someone buying 20 bonds would get a yield to maturity of 3.427 percent. Bond prices move inversely to their yield; a bond generally has a face value of US$1,000.
Quoted yields reflect a small markup by the broker. Some firms also charge explicit commissions. In looking for the best deal, investors should calculate the yield after commissions are taken into account.
A prudent way to invest in individual bonds is through a strategy called laddering, said John Ladensack, executive vice president for fixed income at Schwab in Jersey City, N.J. To start building a laddered portfolio, an investor buys a collection of bonds with different maturities spread over a given time frame. For instance, in a five-year laddered portfolio, an investor buys bonds that mature in one, two, three, four and five years. When the first bond matures in a year, the investor reinvests in one that matures in five years, maintaining the ladder. By doing so, the investor seeks to diversify risk over time while keeping income relatively stable.
To minimize risk, most people who want to assemble bond portfolios on their own should stick to Treasuries or to securities issued by Ginnie Mae, said both Ladensack and Guy M. Cumbie, a certified financial planner and principal of Cumbie Advisory Services in Fort Worth.
Cumbie suggests that investors need at least US$50,000 to buy enough bonds, from different issuers and with different maturities, to achieve enough diversification. Schwab research, however, suggests that an investor can get enough diversification with 8 to 10 bonds, so investors can start with as little as US$10,000, Ladensack said.
An investor buying Treasury or Ginnie Mae issues can get decent prices even when buying so few bonds, but those interested in municipal bonds should have at least US$50,000, because prices of municipal bonds are not as competitive, Ladensack said.
Still, buying individual bonds may not make sense for all investors, Cumbie said. Such purchases can be useful if an investor wants to lock in a specific amount of income over a particular period, or is seeking a set amount of money at a certain time for a specific objective, like paying for a child's education, he said. But investors seeking the highest total return -- interest income and capital gains from buying and selling bonds -- should probably invest in a bond mutual fund or a managed portfolio of bonds because monitoring a bond portfolio "certainly requires more competence or a heck of a lot more energy" than many people have, Cumbie said.
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