The following article in Saturday’s Wall Street Journal caught my eye: “People Are Investing in Bonds Again – Once They Figure Them Out.”
Columnist Joe Pinsker shares insights into this often-confusing component of one’s portfolio, encouraging the reader to proceed with caution when buying individual bonds.
Pinsker’s column took me down memory lane. I started “figuring out bonds” when I enrolled in a Bonds 101 class in 1980 while working at The Chicago Board of Trade. That class served me well.
For the next 12 years, I sold all types of bonds, at rates much higher than today, while working at Smith Barney (now Morgan Stanley) in downtown Seattle.
With interest rates on the rise, you might be looking to lock in higher rates as you adjust your tolerance for risk versus return in your allocation between stocks and bonds. Where do you start? Bonds or bond funds? AAA-rated bonds, A-rated bonds, or non-rated bonds? Callable bonds, pre-refunded bonds, or zero-coupon bonds? And what allocation is best for you? Bonds can be confusing for several reasons:
Interest rate risk: One of the most significant risks in bond investing is interest rate risk. As interest rates rise, bond prices tend to fall, and vice versa. This dynamic within a portfolio can be challenging to grasp and manage in a rapidly changing interest rate environment.
Complexity of the bond market: The bond market is complex, with a wide range of instruments and strategies that can be difficult to understand. Bonds come in various forms including government bonds, municipal bonds, corporate bonds, and high-yield bonds, each with its unique set of risks and rewards.
Lack of transparency: Unlike stocks, bonds trade over the counter, meaning there is no central exchange where prices are listed. This can make it harder for investors to determine the true market value of their bonds, especially in illiquid markets.
Credit risk: Bonds carry a certain amount of credit risk, which is the risk of the issuer defaulting on their payments.
A smart allocation to bonds can serve you well for the rest of your life, especially at these rates. Is it time for you to enroll in Bonds 101?