Debunking Two Investment Myths - Page 2
Investing in Bonds Is Safer Than Investing in Stocks
You hear it often: “I prefer bonds to stocks; they are safer.” Really? It depends! We must consider two factors. First, the type of bonds. High yield bonds, a euphemism for junk bonds, as the name implies, are risky, and might not live to be repaid partially or fully. To compensate for high risks, junk bonds' returns are high. In contrast, government bonds are safer, generally will be paid when due, but provide low returns. The lesson here is, high risk might lead to high returns; low risks instruments have a higher probability of producing a return, but a much lower one.
Irrespective of bond type, if traded on stock exchanges, bond values fluctuate daily based on interest rates, economic conditions, and corporation’s health. So, if you sell a bond before maturity, you might get less than you invested. Whereas, if you held it to maturity, you will get its face value. A $1,000 bond (face value) could trade for $800 before repayment date. Equally, it could trade for $1,200. At repayment, the bond holder gets $1,000.
Before investing, do the sleep test--are you and your spouse likely to sleep soundly when, not if, your portfolio fluctuates? Write investment goals and plans, work with a budget to isolate household funds, understand investment preconditions, and the three P’s of investing: Principles, Players, Process. If you don’t have clear investment goals and plans, Stock Market gyrations will cause you great stress, and you will panic-sell investments you ought to hold!