The Dangers of Bond Investing

Bonds’ decade-by-decade performance has been slightly steadier than that of stocks, when expressed nominally, but there have been periods of severe losses

John Rekenthaler 19 December, 2016 | 3:28PM
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Bonds certainly sound safer than stocks. They are required to pay their stated interest rates, whereas stocks can cut their dividends at any time – if they pay dividends in the first place. Bonds, of course, also stand higher on the credit ladder. Should the organisation go under, bondholders will likely receive at least a partial payment, sometimes even better than that. Stock owners will get nothing.

Add to that, about half of U.S. bonds come courtesy of the federal government. General Motors, Kodak, Compaq, Digital Equipment, Woolworth’s, Arthur Andersen, and American Airlines went bankrupt and stiffed their stock shareholders. While those companies would have liked to have possessed printing presses with which to pay their bills, they did not. However, Uncle Sam does. And its debts are denominated in the currency that it prints. The U.S. won’t be defaulting on its obligations any time soon.

This is all stating the obvious: People understand and appreciate the protections that are provided by high-grade bonds, particularly U.S. federal debt.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.

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