Linkage Myths and Misconceptions – Naples Florida Weekly
Most of the best financial advisers will rightly recommend that you allocate a significant portion of your investment portfolio to bonds. This sound advice is rooted in widely accepted modern portfolio theory.
This article is not designed to undermine that advice, but rather to address the concepts that many investors (and some financial advisors) believe about bonds that are inaccurate.
First, don’t assume bonds are safe just because they are bonds. It’s not always the case. Especially in times of financial difficulty, some bond investments can result in dramatic losses. Therefore, good due diligence is just as important for bonds as it is for stocks.
Second, the concept “I will only hold until maturity” does not apply to bond funds or bond ETFs (exchange-traded funds). Most retail investors invest in bond mutual funds or bond ETFs, and if that’s how you invest in bonds, you’re not investing in individual bonds that can be held to maturity.
Third, even if you invest in individual bonds, understand that bond duration and maturity are not the same thing. In general, the bond’s maturity is the date the bond will end and the principal will be repaid (e.g. a 10-year bond will mature 10 years from the date of issue), so that the duration of the obligation is a complex analysis that is often used instead. bond maturity to measure interest rate risk. Unfortunately, bond durations can mislead investors as to the true risk of long-term bonds. Be sure to consider bond maturities as well as bond duration when making bond investment decisions.
Fourth, the best way to buy individual bonds is usually not from a “specialty” bond brokerage firm. Although there are exceptions, many brokerage firms that claim to specialize in bonds actually take advantage of investors in terms of bond price and quality. I generally recommend that bond investors avoid smaller brokers who loudly advertise their bond expertise. Whether you invest in bonds to diversify your portfolio or invest in bonds to enhance your returns, keep the above concepts in mind as a bond investor. Remember, no matter what, let’s make sure our money is working for us and not for someone else.
Whether you invest in bonds to diversify your portfolio or invest in bonds to enhance your returns, keep the above concepts in mind as a bond investor.
Remember, no matter what, let’s make sure our money is working for us and not for someone else. ¦
— Chris Vernon is an attorney with the Vernon Litigation Group who represents clients in financial litigation across the United States. He is also licensed as a registered investment adviser. The courts have accepted Mr. Vernon as an expert on investment-related matters as a lawyer and investment professional.