Tax and Money Tip of the Week:
The Risks of Bonds – Part I
| December 5, 2012 | No. 120
With recent volatility of the stock market, along with the uncertainty of the real estate market since the “crisis”, some investors have been considering a shift to the bond market.
However, while bonds (and bond funds) do pay regular interest, bond yields are currently very low. Additionally, bonds come with a risk that is often forgotten about today – inflation risk.
Nobody has worried too much about inflation lately. But, between the massive amount of the national debt and the impending “fiscal cliff”, higher inflation is possible.
Inflation is bad for bondholders for 2 reasons –
– Low yielding bond payments won’t allow you to keep up with the rate of inflation, meaning the interest earned on your bonds will buy less
– Inflation causes interest rates to rise, so new bonds would pay better yields; therefore if you sold your older bonds, you would lose money as buyers could obtain newer bonds with higher yields
So while bonds may appear to be that “safe” investment, remember that even bonds have risks that should be considered.
Questions or Comments?
Mark Vitek, CPA/PFS, CFP®
…until next week.