Review: Bonds aren’t as risk-free as investors may think

In all honesty, this article doesn’t really say much. I’ll save you a couple minutes: You can lose money investing in bonds. If you want a guarantee, buy a CD from an FDIC insured bank (OK, I added the last part).

But if bonds aren’t risk free, why should they be in your portfolio? They’re supposed to be the safe part of your portfolio, aren’t they?

First off, “safe” is a dangerous term. Finance doesn’t really have any guarantees. Everything is about managing tradeoffs. Since risk and return are two sides of the same coin, you can’t expect to receive your returns without taking some level of risk.

At McLean, we’re interested in how much risk you’re taking and how the different risks you are exposed to play together in your portfolio.

Bonds play a huge role in making your portfolio work. While they aren’t risk-free, the bonds we use with our clients don’t take on much risk. We usually describe them as the ballast of the portfolio. They may move around a little bit, but they are there to help keep the total portfolio (and higher risk stock portions) grounded.

Everything you put in your portfolio should have a purpose. Portfolios need to be designed, not accumulated. You need to understand how all of the different pieces of your portfolio relate to each other, and how they help move your portfolio forward.

For more on how you can think about this, take a look at our ebook “12 Principles of Intelligent Investors.”

 

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