While many investors generally regard bonds as low-risk investments, it is important to recognize that bonds are NOT riskless investments. Below are a few key things to consider when evaluating a fixed income investment:
- Bonds can go up and down based on market conditions, credit quality, and interest rates
- Bonds can lose money, especially if sold before maturity
- “Bonds” is a very broad category that encompasses the safest to the riskiest classifications
An investor saying he owns a bond is akin to one saying he owns a car… what type?
In recent years, many investors have responded to the prevailing low-rate environment by “reaching for yield.” Essentially, they are buying lower quality, less secured, longer-dated bonds to try to match their cash flow needs. Except for Puerto Rico municipal bonds, this has yet to create a market-wide shock.
Consider the points below:
- In 2008, US High Yield returned an equity-like -26.2%
- In the last 25 years, US High Yield bonds have lost in 6 calendar years
As with equities, it is vital that a bond investor know WHAT he owns, WHY he owns it, and WHEN he should cut ties and sell it. No different than investing 100% of one’s equity exposure in oil exploration companies, investors need to be wary of over-allocating to the riskiest segments of the fixed income markets.
Just because something has worked for the last 10 years doesn’t mean it will work for the next 10 years. One might consider the Tech Bubble of the late 1990s as a fair parallel to the valuations of the riskiest segment of fixed income today.
Reliability of Sources The articles and opinions expressed in this document were gathered from a variety of sources, but were reviewed by Head Investment Partners,LLC prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. In all cases, please contact your investment professional before making any investment choices.
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