Are bonds a “safe” investment?
Bonds are typically seen as a less risky investment than shares, mutual funds or property, as our basic investment products video explains.
Despite this, there are circumstances under which bond investors can lose money – and environments with rising interest rates can be particularly challenging for bond holders. An earlier eZonomics poll explains that bond prices typically fall when interest rates rise. It might pay to remember interest rates are still at historic lows in many places around the globe in the wake of the 2007 global financial crisis. Investors in bond funds may well have seen their investments fall in value in recent weeks as strong economic data in the United States and elsewhere signalled a possible interest rate hike could be ahead, altering bond yields. Such declines in value were a turnaround after several strong years for bonds.
How bonds work
The eZonomics video How bonds work explains the basics of bonds. It tells how bonds are large loans to governments or companies that are broken into smaller packages and sold to investors. In some countries it is possible for investors to buy individual bonds but most often individuals buy bonds in a collective product, such as mutual fund. Understanding how bonds work – and what can drive their prices – is an important part of investing. Only 21% of 1500 people in a major survey in the United States knew the relationship between interest rates and bond prices.
Know how much risk you can take
The recent sudden change in bond markets is a reminder of the risks involved in investing.
eZonomics’ Four tips for buying bonds gives ideas on what to watch for. In addition, knowing how much investment risk – or more simply the chances of losing money – you are prepared to take is important to managing your money.
As economist Chris Dillow blogs for eZonomics knowing how much risk you want to take “is the first thing you should do in managing your money. Other decisions, such as which shares or funds to buy, are secondary matters.”