Ever since the housing bubble burst and the stock market crashed, investors have been fleeing equities and either keeping their money in cash, or investing it in bonds. This is done for safety. With cash, one cannot lose principal, unlike with equities. I fear though that many investors misunderstand bonds as being like cash in that it is hard to lose the principal. While being more conservative than equities, one can still lose money when investing in bonds. My fear is that too many investors think that conservative means not losing money when that is not the case. How Bonds Work The historically low interest rates have propped up bond prices along with investors pouring money into bonds. To understand why this is a problem, we need to … [Read more...]
Navigating The Bond Market
Currently, the yield on a 10-year Treasury note is 1.5%. This means that if you invest in a 10-year Treasury note, you will receive 1.5% interest over the next 10 years. Considering that inflation averages close to 3% per year, 1.5% is not very attractive. After all, you will be losing purchasing power every year. To earn a higher return, bond investors have two primary options: Invest in lower quality bonds Invest in longer term bonds Unfortunately, there are risks with both of these choices. If you were to invest in lower quality bonds, the risk of the company defaulting increases and you risk losing your money. This is one of the reasons why the bond is lower quality. If you are willing to take on this risk, you may want to … [Read more...]
