Are bond investments high risk?

Investing can be a tricky subject, especially if you’re new to it, but having the right balance works for many investors

12:34 07 February 2013

Today, more than ever, investing in bonds could probably be a risky undertaking.  However, no type of investment really comes with a guarantee that it will earn you the expected or promised income.  This is the very nature of investing.  The simple formula is finding a balance between the risk and the expected income and letting your money work for you.

 

Investment advisors can help their clients become more aware of the amount of risk in each type of investment.  Generally investors love it when the stock market is bullish and go the extreme of taking more risk.  But when the market is down, they can’t wait to dump their stocks and become apprehensive of the potential losses.

 

In both scenarios, moderation and well thought of decisions are the key to keeping your losses to a minimum your sanity intact.

 

Talks about the bond market and its risk have been around for quite some time. It can be recalled that a heavy shift from stock investment to bond investment happened in 2008 to 2009. Hundreds of investors sold their stocks to transfer it to the perceived safeness of bond investments.

 

The question is how much lower can it go and still remain viable for the investors.  Japan has been in this scenario for the last two decades and the US finding itself in the same situation is not too far-fetched.  If the interest rates rise, it means that the basic value of the bonds will drop and investors who do nothing to counteract will find themselves losing a big chunk of their investment.

 

Interest rates may rise for various reasons, and economies can suffer. The laws of economics dictate that if you spend more than what you earn, you will suffer the consequences.

 

The economy seems to be dismal with unemployment continuing to be high.  Corporate revenues are beginning to dwindle as production of goods and purchasing indexes are way down.  Real estate has not gotten out of the slump.  The economic condition in Europe is no better. It would relieve the tightly-wound nerves of the investors a little if the interest rates as well as the bond prices remain constant for some time.

 

With the very minimal interest rate, investors who largely depend on the income from this type of investment (like retirees) opt to transfer their money to the more high-risk stock investment. This is in order to earn dividends and achieve a modicum of growth to cope with their financial needs.

 

It is best to have a tailor-made mapping of your equities and fixed earnings from the stocks and bonds based on your personal financial requirements, goals, age, and their open-mindedness to risks.

 

Reputable investment advisors talk to their clients about the Modern Portfolio Theory wherein the assets are allocated or invested in diversified classes such as small companies, large companies, foreign and local companies and other optional investments that are suitable during the time.  Another strategy will be to invest on some short to mid- term funds then some treasury or corporate bonds, then that would be it.