Q: My portfolio analysis states that 40 % of bonds. What does this mean?
A: Bonds are both recovering the money together with interest payments, and requesting other entities to return to another entity. Bank CDs are classic examples. Imagine to give banks $ 1,000 for two years. In the meantime, you will receive interest regularly and recover the original deposit at the end of two years. This is all the same if you buy a US Treasury bond for two years.
The entity and loan protection you rent are very different. If the loan is not repaid, you can rent it to a mortgage and claim the basic real estate. It may be rented to cities, counties, or another country, and if a loan fails (default), the ability to claim assets is very limited.
Consider several factors when evaluating bond investment profiles. Important factors include credit, time risk, inflation risk, and interest rate risks.
Credit risk refers to the possibility you will not regain all or your money. This may be the “Junk Bond” issued by a company with an unstable future. They may provide high interest rates to guide investors to lend money, but loans are dangerous in terms of repayment as promised.
Conversely, the government can print and repay more money at any time, so the US government has no risk of credit risk (this money may not be as valuable as you want. Note that it is subject to inflammation).
The risk of time indicates how much money you lend (5 years and 10 years of bonds). For a longer time, expose you to more risks -the entity you lend to lend may not work (change in credit risk). Also, the effects of changes in inflation and interest rates may be larger than expected (described below). In a traditional economy, long -term loans carry higher interest rates for this reason.
The current and expected inflation is a factor in bonds. If the current inflation rate is about 3 % a year and is expected to be the same during the loan period to someone else, you will want to get enough to pay for inflation and tax during the loan period. (The value of the original dollar rented to save). It is also necessary to compensate for the money (for inflation) of the money that has returned at the end of the loan. If you lend some money for 10 years, repaying the original amount will much less worth purchasing.
Changes in interest rates can dramatically affect the value of the property while owning bonds. I often saw this from 2022 to 2023, when the federal preparation system quickly raised interest rates. All old bonds paid much lower interest rates than new bonds. In other words, existing bonds needed to be sold at a much lower price.
As an example, suppose you have purchased a $ 1,000 CD of 10 years that paid 2 % a year three years ago. The current 10 -year CD pays 5 % interest. (Currently 7 years) If you want to sell 2 % of CDs, we will provide a much lower price than the original $ 1,000. term. Conversely, it occurs when interest rates generated from the 1980s to 2007 decrease. Changes in interest rates can reflect the existence and beliefs of inflation, but can also change for other reasons.
All of these factors are considered when investing bonds. All investors need to consider various needs and risk tolerance. Not easy.
STEVEN PODNOS is a financial planner only at the center of Florida. He can be contacted by steven@wealthcarellc.com and www.wealthcarellc.com.
