I often hear that I should diversify my investment portfolio with X% stocks and Y% bonds, ostensibly to mitigate the risk.
My question is what exactly this guidance means in terms of HOW to invest in bonds. For diversification purposes it seems like I'd want to do this via a bond fund rather than buying individual bonds. However, it is my understanding that bond-funds don't generally hold those bonds to maturity, but rather trade them like equities. That seems too similar to how my mutual funds operate and doesn't seem like it would be an effective hedge.
Shorter version of my question: If I am trying to follow guidance to, say, put 80% in stocks and 20% in bonds. Does this advice typically mean I should be investing in:
- Individual Bonds
- Bond Funds
- Defined Maturity Bond Funds
- Something else?
I think people are misunderstanding the intent of my question. There are two main approaches to bond investing:
a) Buy and hold to maturity; and
b) Buy and sell prior to maturity (I believe this is how bond funds work).
What I am asking is which of these two approaches is intended by the advice "Diversify your investments across stocks and bonds with some allocation between them."