Overwhelmingly, financial advisers steer their clients to funds. Generally, this works out very well for them, and often not so well for the clients. Funds of all kinds, whether stock or bond, tend to have layers upon layers of fees. The more "sophisticated" (i.e. complicated) the strategy, the higher the fees. Often as not, some of these fees make their way back to the adviser who suggested them in the first place. Well, you philosophize, you get what you pay for, right?
With stock funds, I think the answer is "WRONG"! You tend to get a lot less than you paid for, as the track record of stock fund professionals is, by and large, abysmal. They rarely keep up with the indexes they supposedly track, they hop in and out of whatever looks hot, they dress up the portfolio at quarter's end so that it looks like everyone else's tired results, they give and take kickbacks left and right, and draw huge salaries along the way. All of this comes out of YOUR pocket. ETFs, the really big ones, and those that track really big indexes, do much better. They have much less turnover, are therefore tax-efficient, and have very low expense ratios. They are absolutely the way to go, if you want exposure to stocks. However, advisers rarely steer you to them.
Well, then, how about bond funds? Actively managed bond funds have most of the warts that deface their stock counterparts. Fees, fees, fees, churn, churn, churn! Yes, they may get better purchase and sales prices and manage risk a bit more artfully than you can, but the elevated fees wipe those advantages away. How about bond ETFs? Well, they're fairly new, and many of them are synthetic products. You're not really buying a portfolio of bonds, you're buying a debt obligation of a third party. I see heartbreak looming.
But, surely a low-fee bond fund (say Vanguard) is a good choice? If you really don't want to do the work, then OK. But you lose all sorts of control. When you buy a portfolio of bonds, you can decide exactly what you want to buy, and how long you want to keep it. You can ladder religiously (each year further out gets the same dollar allocation), or you can move maturities in any direction you like. I, for example, have skewed heavily to the long end. Above all, you can lock in a position. If those 7.75% Union Carbide bonds of 2096 look good, you can load up, and your grandchildren will collect the money until THEY are old. What better way for them to remember you fondly?
With a bond fund, this lock feature is not possible. Sure, you can start out with a long-bond fund and a nice high yield. Sure as clockwork, though, newbies will flock in as yields start to fall. The fund will soon be buying lower-yielding bonds to put their money to work. The fund will bear the costs of investing this new money, which means that you share those costs, and they can be substantial. Should rates rise later, you will also share the costs of redemption, which might be very high indeed. Losses incurred selling the dogs will be shared by you, even if those dogs weren't in the fund when you joined the party. The bottom line is that a bond purchase reflects your investing values at one point only, the time you buy in.
There is one scenario where the ability to control duration has serious positive consequences. Typically, upon inheritance, the deceased's assets are "stepped up" in value. That means that the tax basis for the recipient is the value at death, not the original value. So, if a bond has increased steeply in value (remember I urge you to try to buy bonds at a discount to par), the tax basis for your heir is the more recent value. Upon maturity therefore, the tax bill will be substantially lower, perhaps even non-existent. While this can work even more spectacularly in the case of appreciated stocks, the implications for bond investors are also significant.
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