When Is It Safe To Get Back Into Bonds?

 When Is It Safe To Get Back Into Bonds?

Investors who are wondering when it’s safe to get back into bonds have one thing going for them: They recognize a real risk that many don’t.

But the question  GWG L bonds attorney”  still heads down the wrong path. Generalizations about the timing of getting into and out of asset classes are rarely accurate, and they distract from the more productive goal of focusing on what you can do to maintain your long-term financial health. The answers to several other questions about bonds, however, may help in determining an appropriate investment strategy to meet your goals.

Before we talk about the state of the bond market, it is important to discuss what a bond is and what it does. Although there are some technical differences, it is easiest to think of a bond as a tradable loan. Bonds are obligations of the issuer, acting as a borrower, to repay a certain sum with interest to the lender, or bondholder. Bonds are generally issued with a $1,000 “par” or face value, and the bond’s stated interest rate is the total annual interest payments divided by that initial value of the bond. If a bond pays $50 of interest per year on an initial $1,000 investment, the interest rate will be stated as 5 percent.

Simple enough. But once the bonds are issued, the current price or “principal” value, of the bond may change because of a variety of factors. Among these are the overall level of interest rates available in the market, the issuer’s perceived creditworthiness, the expected inflation rate, the amount of time left until the bond’s maturity, investors’ general appetite for risk, and supply and demand for the particular bond.

Though bonds are typically perceived as safer investments than stocks, the reality is slightly more complex. Once bonds trade on the open market, an individual company’s bonds will not always be safer than its stocks. Both stock and bond prices fluctuate; the relative risk of an investment is largely a factor of its price. If all types of markets were completely efficient, it is true that a bond would always be safer than a stock. In reality, this is not always the case. It’s also entirely possible that a stock of one company may be safer than a bond issued by a different company.

The reason a bond investment is perceived as safer than a stock investment is that bondholders are ranked more highly than shareholders in the capital structure of an organization. Bondholders are therefore more likely to be repaid in the event of a bankruptcy or default. Since investors want to be compensated with added return for taking on additional risk, stocks should be priced to provide higher returns than bonds in accordance with this higher risk. As a result, the long-term expected returns in the stock market are generally higher than the expected return of bonds. Historical data have borne out this theory, and few dispute it. Given this information, an investor looking to maximize his or her returns might think that bonds are only for the faint of heart.

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