August 15, 2013
I thought this was safe!?!? Recently, this has been a common reaction of folks opening their monthly statements to see drops in their account values, despite owning investments they believed to be safe. Yes, I am talking about bonds - and more specifically, the idea of what a "bond" is.
Wanting to own bonds for a specific reason is akin to wanting medicine to treat an illness. You know you need something to make it better, but would you walk into your pharmacy and grab the first medicine off the shelf? If you did, would you soon be cured? Maybe. Then again, maybe not. Instead of marching into your Pharmacy like Sherman through Georgia and grabbing the first thing you see, you consult your doctor. Symptoms and any allergies that you may have are considered, before a prescription is provided and you're back on the path to health.
It's the same with bonds. It's easy to think that owning any instrument with the word "bond" in the title is going to be safe and stable - only that's not the case. Owning an individual bond is one thing, and owning a bond mutual fund, as you would within your 401(k) or employer plan is a different beast. Consider the performance of PIMCO's Total Return Fund, over the past few months as interest rates have risen. Often considered a beacon of safety for investors, this fund has proved to be anything but recently. Now, unlike bond mutual funds, an individual bond has a specific maturity date - a light at the end of the tunnel upon which you receive your principal investment back, along with interest you've collected along the way. More details regarding the risky business of owning bond mutual funds can be found here. Bonds and mutual funds holding bonds are two different things. It's essential to treat them as such.
I do not want to sound like Mr. Doom-and-Gloom today, just to provide clarity. Bonds can be excellent holdings for someone seeking stability and income. Just remember that when the time comes and you want to own bonds for your portfolio - have a conversation first. Just like with your doctor, discuss your symptoms (need for income and stability), and any allergies (fears and hesitations) that you have. Only then can you find the right prescription and be on your way to better (financial) health.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).