At the beginning of January, many of us resolved to improve our finances in 2016. Whether we contacted one of the many Laguna Beach investment firms or chose the DIY route, a good number of us considered investment options as part of that plan.
If you're a little nervous about the risks that come with investing in the stock market, you might have thought about investing in bonds. While the conventional wisdom is that bonds are a safer bet, it's important to understand that they are not foolproof, either. Here are some bond-related hazards to consider as you begin your financial journey in 2016:
1. Tied to interest rates
2. Some bonds can be “called”
3. Issuer's ability to pay
4. Market hazards
5. Inflationary risks
1. As interest rates go up, new bonds are issued. This decreases the attractiveness of older bonds and lowers their value.
2. As part of your January financial awareness plan, it's important to know that some issuers reserve the right to “call” their bonds prematurely. As a result, you may earn only face value.
3. If you're concerned about stability in 2016 — and who isn't? — be aware that bond payments depend on the ability of the issuer to pay in a timely manner. Bonds with triple-A ratings are the most stable, while those rated Ba or lower by Moody's or BB by Standard and Poor are considered junk bonds.
4. Bonds aren't immune to the rule of supply and demand. In-demand bonds earn a higher return on your investment.
5. Bonds provide fixed-rate payments, so inflation could lower their value over time. On the plus side, this means deflation will cause your bonds to go up in value.
If you're looking for a place for your money this January, you can still feel confident about investing in bonds. Join other Laguna Beach investors in choosing this option. Just as importantly, take comfort in your knowledge of the risks that come with any financial investment in 2016 and beyond.
Would you like to learn more about the benefits and risks of investing in bonds? Call Bart Zandbergen CFP® at (949) 297-8318 or visit his website to schedule a free consultation.