Comments on: Risks Involved in Buying Bonds

By: Investor Junkie

Investor Junkie — Tue, 15 Dec 2009 13:42:58 +0000

Larry: Even better yet did you know she was a spokesperson for the FDIC?

http://www.youtube.com/watch?v=eX_nLEe0SPE

By: Monevator

Monevator — Tue, 15 Dec 2009 11:55:32 +0000

Great article as per usual. Just a note (which I know you know!): Inflation/rate risks do increase with duration, but of course that’s usually reflected in a higher yield for the long-term bond.

As usual (but not always): higher risks, higher reward.

By: Larry

Larry — Tue, 15 Dec 2009 02:18:10 +0000

That’s the one! (Though she’s usually addressing Jane six-pack rather than Joe.)

By: Investor Junkie

Investor Junkie — Mon, 14 Dec 2009 21:33:28 +0000

Larry: You mean Suze Orman? The one who has very little (less than 10%) skin in the stock market? She caters to the Joe six pack, and not to the intelligent investor.

By: Larry

Larry — Mon, 14 Dec 2009 21:31:44 +0000

IJ: “That CD that’s FDIC insured? It has inflation and interest rate risks.”

Exactly! And one could argue that those risks are as least as great as the volatility risks inherent in equities. This is probably the main reason I see red when That Blond Woman on CNBC keeps advising people to hold on to a lot of FDIC-insured cash to keep themselves “safe and sound.”

By: Mike

Mike — Mon, 14 Dec 2009 17:38:16 +0000

Hi Larry. That’s a great question. I plan to tackle it in more depth in a blog post soon. But for right now, my answer is that it depends entirely upon your goal with the investment.

If the purpose is simply to serve as a low-volatility asset class in your portfolio, I’d stick with short-term bond funds every time.

If, however, the goal is to fund a specific cost at a specific point in the (distant) future, a long-term TIPS might be a good fit in that it would make it easy to see how much you need to invest now to pay for that expense later.

By: Investor Junkie

Investor Junkie — Mon, 14 Dec 2009 16:58:21 +0000

@Larry: For me personally? Never! Any bond longer than 10 years has too much risk for the above mentioned reasons. William Bernstein has some stats in his books.

Tax and political risks are other risks not mentioned. These can be an issue for investments, especially in the environment we live today.

The one lesson that should be learned for any investment. There is no such thing as “100% risk free” investments. ALL (I repeat ALL) investments have risk and it’s wise to determine those risks. That CD that’s FDIC insured? It has inflation and interest rate risks.

By: Larry

Larry — Mon, 14 Dec 2009 15:19:55 +0000

All this being the case, under what circumstances would you want to go long-term with bonds?

By: Rick Francis

Rick Francis — Mon, 14 Dec 2009 14:28:02 +0000

Mike,

It’s great to see the risks of bonds explicitly stated. I think people tend to gloss over the inflation and interest rate risks when thinking about bonds. It seems to me that today may be a very risky time for bonds as we have historically low interest rates and lots of government spending that could lead to inflation…

-Rick Francis