A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

No-Load 
Bond 
Funds 
Are
Appropriate Vehicles for Individual
Investors
Open-end bond (mutual) funds give some of the long-term
advantages of the zeros but are much easier and less costly to
buy or sell. Those that I have listed in the Address Book all
invest in long-term securities. Although there is no guarantee
that you can reinvest your interest at constant rates, these
funds do offer long-run stability of income and are
particularly suitable for investors who plan to live off their
interest income.
Because bond markets tend to be at least as efficient as
stock markets, I recommend low-expense bond index funds.
Bond index funds, which just buy and hold a broad variety of

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bonds, generally outperform actively managed bond funds. In
no event should you ever buy a load fund (a fund with a
commission fee). There’s no point in paying for something if
you can get it free.
The Address Book lists several types of funds: those
specializing in corporate bonds, those that buy a portfolio of
GNMA mortgage-backed bonds, those investing in tax-
exempt bonds (which I will discuss in the next section), as
well as some riskier high-yield funds appropriate for
investors willing to accept extra risk in return for higher
expected returns. My own favorite is a Total Bond Market
Index Fund, which holds all the different categories of bonds.
Tax-Exempt Bonds Are Useful for
High-Bracket Investors
If you are in a very high tax bracket, taxable money funds,
zeros, and taxable bond funds may be suitable only within
your retirement plan. Otherwise, you need the tax-exempt
bonds issued by state and local governments and by various
governmental authorities, such as port authorities or toll
roads. The interest from these bonds doesn’t count as taxable
income on your federal tax form, and bonds from the state in

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which you live are typically exempt from any state income
taxes.
During 2010, good-quality long-term corporate bonds were
yielding about 6 percent, and tax-exempt issues of
comparable quality yielded 4½ percent. Suppose your tax
bracket (the rate at which your last dollar of income is taxed)
is about 36 percent, including both federal and state taxes.
The following table shows that the after-tax income is $66
higher on the tax-exempt security, which is clearly the better
investment for a person in your tax bracket. Even if you are
in a lower tax bracket, tax-exempts may still pay, depending
on the exact yields available in the market when you make
your purchase.