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A Reminder To All Investors: Bonds Are Not Safe

Friday, July 12, 2013 - 5:15 PM
From The Atlantic:

      "...Risk is part of the sea in which we all swim. You can
       have too much, but you can't have none.

Read more:
4
cumuluscumulus364 posts since
Jan 16, 2010
Rep Points: 1,705
1. Friday, July 12, 2013 - 5:44 PM
I especially like this little snippet in the article:

"Risk is part of the sea in which we all swim. You can have too much, but you can't have none. June was a wake-up call. Embrace risk, and you will probably do well in this world. Try to avoid it, and you will bring it on."

How true.
6
ShorebreakShorebreak2,699 posts since
Apr 6, 2010
Rep Points: 14,632
2. Friday, July 12, 2013 - 9:20 PM
I too like the closing paragraph of the article.

One of my favorite quotes:  "A ship is safe in harbor, but that is not what ships are for".  There is a measure of risk in everything, and to hope for total safety is to search in vain for something which is at best only an illusion. 
3
pearlbrownpearlbrown1,491 posts since
Nov 2, 2010
Rep Points: 6,486
3. Saturday, July 13, 2013 - 1:58 PM
It is a "great time" to tell us that.  If one reviews all the financial articles in the past, bonds are considered as "fixed income" and to be leveraged with more risky equity investment.  Now, after all the bond disasters recently, you are telling us that they are "not safe"?  Come on, you (the author) are too smart for us to figure this one out:D
2
51hh51hh1,476 posts since
Jan 16, 2010
Rep Points: 6,427
4. Saturday, July 13, 2013 - 5:09 PM
The article tends to, putting it mildly, exagerate the inherent risks in bonds. If one holds individual Treasury or investment grade bonds to maturity, and has received a fixed rate of interest and the return of their original principal, the only major risk is interest rate risk, in that rates have gone up significantly during the maturity term of the bond(s).

Bond funds indeed contain higher risks in that the fund's share price fluctuates with the daily moves of the bond market and the fund never matures. It's up to the individual fund investor when to sell, hopefully at a profit rather than a loss, or hold the fund forever for an income stream and ignore the principal fluctuations.

Junk bonds have a default risk attached to them. That's why they are called "junk" and usually come with the an increased yield demanded by buyers of the bond.

In the end, putting one's funds all in one basket brings a proportional risk with it. A fully diversified portfolio will mitigate that risk.
6
ShorebreakShorebreak2,699 posts since
Apr 6, 2010
Rep Points: 14,632
5. Saturday, July 13, 2013 - 8:27 PM
I used to believe that "diversification" was the key; but no more.  If one diversify "too much", one simply neutralizes one's return (several up and several down) with zero return. 

Nowadays, I believe that one has to identify the fruitful areas and put some concentrations on them.  For example, I would not touch gold these days (no diversification to gold).  I never do bonds, either (sure, I bought treaury bonds and zero-coupon bonds and cash them near maturity with high profits).  I tend to concentrate more on small cap vs. large cap equity funds.  I don't do international these days. 

Just my perspectives.
3
51hh51hh1,476 posts since
Jan 16, 2010
Rep Points: 6,427
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