Should I Invest in Bonds?

Even after last week’s podcast Tom has still been hearing the question, “Should I invest in bonds?”. In this Mullooly Asset Management podcast the topics include that question, some bond basics to remember, and a story Tom wanted to share.

First off, Tom wants listeners to understand what buying a bond means. Buying a bond means that you are lending to an organization, such as a big corporation or the government. There are secondary markets, but when a bond is first issued you are the lender. When you buy a bond you pay a market price. There are millions of bonds available today. For example, think about all the different municipalities in New Jersey or the different towns in Monmouth County, all of them are issuing bonds right now. Another important thing to keep in mind is that bonds trade by appointment, they don’t list prices like stocks. When you own a bond you are getting the promise of an interest payment every quarter until maturity. Then at maturity you get the face value of the bond back.

Bonds are intended for the long term investor, but their prices are constantly changing. These changes are caused by interest rates. If interest rates rise after you invest in a bond, the value of the bond will drop. If you hold your bond until maturity you will get face value back. The main problem with this is that investors get antsy. They tend to open their monthly statements and consider getting rid of their bonds before their maturity dates. If you have been asking, “Should I invest in bonds?”, just know that you better plan on sticking it out until the maturity date. Tom also goes over the big difference between bond mutual funds and bonds in this podcast.

Tom shares a story about bonds in this podcast. A colleague of his shared some information with him recently. This broker got into the business a few years before Tom did in 1980. When he started the only fixed income business happening was from individuals selling tax free municipal bonds at $.45 on the dollar. They would do so and replace them with similarly priced bonds to generate a tax loss. The moral is that municipal bonds are largely regarded as one of the safest investments around, but people were losing 50% on them.

So still wondering, “Should I invest in bonds?”. Tom would likely advise against it. The financial planning industry at large seems to think that bonds are a low risk investment. That is certainly not always the case. If you are investing for longer than the next 3-5 years, the stock market is the place for you not bonds. Before you make any type of investment, you should consult with a professional like Mullooly Asset Management.