Bonds...
02-28-2005, 09:41 AM
#1
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Anyone know anything about them, I've been researching and I understand that they are traded until they reach full machurity, my question is, by rule of thumb stocks and bonds seem to counter eachother through weak periods, so to diversify the portfolio Bonds are good. However I am not clear as to the stability of bonds on their own. Are they a fairly fool proof investment or can you get burned?
I am pretty fluent on stocks, but the bonds make me a bit nervous at this point.
I am pretty fluent on stocks, but the bonds make me a bit nervous at this point.
02-28-2005, 01:14 PM
#2
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First let me state that I hold a Bachelor of Science degree in Business Finance from a fairly well-respected University. And while I'm certainly no expert on bonds, I will offer this:
A bond is a debt that is only as good as the entity that issues it. Most well-known corporations and virtually all governments (local, state, and federal) should be fairly safe. There are ratings companies that assign grades to bonds, such as Moody's. Naturally, the safer the bond, the lower the rate of return.
If you buy and hold an actual bond, it will return periodic interest payments, and you will get your money back at maturity (typically 7 to 10 years or more). This is more often desirable for older people or retirees looking for a steady income not related to a paycheck.
Bonds prices increase during periods of declining market rates of interest. In periods of rising rates (likely today, as they can't really go any lower) the value of bonds will decrease. This is no big deal if you hold an actual bond because you will still receive the "coupon" which is the interest payment. However, as your money will be tied up at a relatively low rate, you are exposed to "interest rate risk" which means you'll be kicking yourself for tying up money paying 5% when everyone else is making 10%.
Bond funds routinely buy and sell bonds, and a good one will skillfully take advantage of market trends in order to maximize return. This will be harder to do during a period of rising rates (likely in the near future, IMO).
Certainly, bonds can and should be used to add diversity to an investment portfolio. However, long term rates of return generally favor stock funds over bond funds by 4 or 5 percentage points. You, being a young fella, should probably not make them a significant part of your portfolio, IMHO.
Sorry if this is boring, but hey, it's bonds.
A bond is a debt that is only as good as the entity that issues it. Most well-known corporations and virtually all governments (local, state, and federal) should be fairly safe. There are ratings companies that assign grades to bonds, such as Moody's. Naturally, the safer the bond, the lower the rate of return.
If you buy and hold an actual bond, it will return periodic interest payments, and you will get your money back at maturity (typically 7 to 10 years or more). This is more often desirable for older people or retirees looking for a steady income not related to a paycheck.
Bonds prices increase during periods of declining market rates of interest. In periods of rising rates (likely today, as they can't really go any lower) the value of bonds will decrease. This is no big deal if you hold an actual bond because you will still receive the "coupon" which is the interest payment. However, as your money will be tied up at a relatively low rate, you are exposed to "interest rate risk" which means you'll be kicking yourself for tying up money paying 5% when everyone else is making 10%.
Bond funds routinely buy and sell bonds, and a good one will skillfully take advantage of market trends in order to maximize return. This will be harder to do during a period of rising rates (likely in the near future, IMO).
Certainly, bonds can and should be used to add diversity to an investment portfolio. However, long term rates of return generally favor stock funds over bond funds by 4 or 5 percentage points. You, being a young fella, should probably not make them a significant part of your portfolio, IMHO.
Sorry if this is boring, but hey, it's bonds.
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