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Bonds 101 – Payne Capital Management
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Bonds 101

Bonds 101

 

By Michelle McKinnon, Financial Advisor

There’s been a lot of chatter in the news lately about interest rates and bonds. So what does that mean and how does it impact us? Well in this article, I’d like to say just a couple things about bonds without getting too in-depth. A quick “101” refresher, so to speak.

Three Keys:
1

High Quality Bonds historically have had an inverse relationship to stocks

Interest rates often have an inverse relationship to bond prices

It is better to own an actual bond than a mutual fund of bonds

High quality bonds historically, often have had an inverse relation to stocks. So when stocks go up, usually bonds go down and vice versa. It doesn’t always play out that way, but is a good rule of thumb. Another important element to look at is the relationship between interest rates and bond prices. In fact, I’d say that’s probably the most crucial point. So what happens to bond prices when interest rates (or yields) go up? Well, they typically go down because it’s another inverse relationship.

Now, for people in their 20’s, 30’s or even 40’s, odds are you don’t have a significant percentage of your portfolio allocated to fixed income, therefore fluctuations in the bond market probably aren’t going to affect you much. During that time of life, you normally wanted to be invested more aggressively and focused on a growth oriented portfolio. But for people in their late 40’s, 50’s or 60’s, there’s a chance you will have a larger percentage of your wealth invested in bonds, and I’d like to add something about that.

The reality is we shouldn’t be so concerned about bonds themselves, but rather how we own our bonds. We need to remember that owning the actual underlying paper (the bond) is what matters most, and to steer clear of just owning a mutual fund of bonds. You want to have the exact date of when your principal will be returned to you (date of maturity) and the fixed interest rate youwill receiv e (coupon). So in the worst case, you will receive your money back and a fixed interest along the way. Unfortunately you do not get that certainty in a bond mutual fund; remember there are no dates of maturities on those funds. We want permanency and definition, this is a vital distinction. If you have additional questions about bonds you can always email me here: michelle.mckinnon@paynecm.com

 

 

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