Don't Overlook the Risks of Individual Bonds
High transaction costs, lack of flexibility, and credit-quality risk loom large.
Note: This article is part of Morningstar's December 2014 Guide to Better Investment Picking special report. An earlier version of this article appeared in November 2011.
It's a question that I've gotten a lot over the past few years, and it's a good one: If you're concerned about the prospect of rising interest rates crunching your bond fund, why not opt for individual bonds and hold them until maturity? Provided you purchase a bond from a creditworthy issuer, you can simply collect your income stream and then get your principal back when the bond matures, regardless of the interest-rate climate.