Last, but not least of our asset classes is Fixed Income. Before interest rates started stinking up the place after falling to near zero, fixed income products were popular with seniors as a safe and steady source of income. As with most investments, they go by many names but bottom line, we’re talking about debt. If you buy a bond, you’re loaning someone money.
A corporate bond is a loan to that corporation and any risk is based on that company’s ability to pay the interest and eventually repay the principle. A Treasury bond is a loan to our government and is about as risk free as you can get depending on how you feel about our country. Local governments can issue municipal bonds and these come with special tax benefits. Check with a tax specialist for specifics.
There’s a direct, inverse relationship between interest rates and bonds. For example, if you have a bond that yields 2% and interest rates start to climb, your bond will lose value. When other bonds are yielding 4%, your bond will look like a Yugo with three flat tires and no engine. You might resolve to hold it until maturity just to get your investment back.
When interest rates go back up (and they will), that’s the best time to buy bonds. Then, when interest rates start to come back down (and they will), your bond will increase in value in addition to all the juicy interest you earn while holding it.
Commissions to buy a bond are buried in the price. I’ll explain further on the website. As with anything else, the discount broker can sell you the same bond for less but they won’t hold your hand.
Is there a caboose to this train of thought? Yes. Don’t buy bonds right now unless you’re prepared to hold it for the duration which could be as much as 30 years.
With interest rates on the rise, consider a bond ladder if you build a bond portfolio. This is nothing more than a series of bonds with different maturities. Instead of locking in one rate for 30 years, they will mature at different times and hopefully yield better returns as interest rates rise. The two benefits are diversification and no market risk so long as you hold until maturity.
In other news, let’s talk to our elected peeps about fixing the Indian River before it’s too late. Maybe get a little crazy and talk common sense water management.
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