Why Bonds May Be Better Than Stocks
Bonds may not be as visible in the media as stocks. There’s a lot more excitement that surrounds the area of stocks which makes them written about in the press a lot more. In fact, there are investors who have never heard of a bond even though they may have dabbled in the stock market and even looked at instruments like traded funds and futures. However, the fact remains that though bonds might not be as high profile and very often bring in lower returns, they are probably safer and healthier.
Stocks have a certain thrill that comes attached with them. Picture yourself buying a stock and waking up the next day to watching it having risen in value by 10%. It’s heady, that feeling. And of course, investors who watch their stocks doubling in a few months feel that they are very smart or they are very lucky! But inbuilt with the thrill factor is also the factor of risk. Stock prices are extremely volatile and what goes up, up, up can come crashing down in a moment, totally unexpectedly. Very often, the swings can be very large and rapid indeed.
Bonds on the other hand have a more boring tag attached to them. But if you look closely, they do come in a variety to choose from – reliable and unexciting U.S. or corporate AAA 10-year ones that give you a steady but small yield to junk bonds that can give you more than 15%! With bonds, too, you have to weigh them with the same principles as you would stocks – the calculated risk factor against the rewards you hope to get. This is the standard trade-off. However, the risks in the bond market are considerably lower and what’s even more comforting, they are easy to calculate.
You need more capital for the initial investment in bonds. You might only get one bond for a hundred shares of $10 stock. You’ll also find mutual funds that invest mainly in bonds and your broker could advise you about other options like ‘pay as you go’ plans. The trouble with bonds is the fact that you can’t trade them as easily as you would stocks. As far as stocks go, for most of us, it’s a matter of a few clicks of the mouse. Bonds however, require you to make that telephone call and not all bonds can be traded through brokers. Bonds also attract a higher commission. It’s best to check with your broker who will list out the options for you.
When you are looking at the short term, bonds are definitely less volatile. However, one thing they are sensitive to are interest rates. Bonds always have a coupon rate while shares have dividends which one could look at as interest being paid on the stocks though this could be sometimes skewed according to the whims of the management. Where bonds are concerned, the coupon rate is fixed at the time when they are issued. So if you are planning to sell your bonds, particularly before their date of maturity, this rate will be compared to other investments that give interest. So you will find that the prices of bonds are affected by not only what their coupon rate is but also how far they have to go before their maturity. Bonds tend to be more influenced by government policies than stocks are. What could affect bonds are massive borrowings, which could mean the government issuing bonds or by setting the prime rate lending rates or thanks to legislation that has an effect on insurance companies, banks or large institutions.
You need more capital for the initial investment in bonds. You might only get one bond for a hundred shares of $10 stock. You’ll also find mutual funds that invest mainly in bonds and your broker could advise you about other options like ‘pay as you go’ plans. The trouble with bonds is the fact that you can’t trade them as easily as you would stocks. As far as stocks go, for most of us, it’s a matter of a few clicks of the mouse. Bonds however, require you to make that telephone call and not all bonds can be traded through brokers. Bonds also attract a higher commission. It’s best to check with your broker who will list out the options for you.
When you are looking at the short term, bonds are definitely less volatile. However, one thing they are sensitive to are interest rates. Bonds always have a coupon rate while shares have dividends which one could look at as interest being paid on the stocks though this could be sometimes skewed according to the whims of the management. Where bonds are concerned, the coupon rate is fixed at the time when they are issued. So if you are planning to sell your bonds, particularly before their date of maturity, this rate will be compared to other investments that give interest. So you will find that the prices of bonds are affected by not only what their coupon rate is but also how far they have to go before their maturity. Bonds tend to be more influenced by government policies than stocks are. What could affect bonds are massive borrowings, which could mean the government issuing bonds or by setting the prime rate lending rates or thanks to legislation that has an effect on insurance companies, banks or large institutions.
Therefore what seems to emerge is that it pays to have a diversified portfolio. Whether you directly buy them or you possess them thanks to your mutual funds, bonds spell a lot more safety and would be a welcome addition to your investments.
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