Why Bonds Are NOT Risk-Free Investments

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. 

Return on Products The return assumptions are not reflective of any specific product, and do not include all fees or expenses that may be incurred by investing in specific products. The actual returns of a specific product may be more or less than the returns used. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to directly invest in an index. Financial forecasts, rates of return, risk, inflation, and other assumptions may be used as the basis for illustrations. They should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. The return and principal value of the investments will fluctuate so that, when redeemed, they may be worth more or less than their original cost. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment. 

Opinions Opinions expressed are subject to change without notice and are not intended as investment advice or a solicitation for the purchase or sale of any security. Please consult your financial professional before making any investment decision.