Are Bonds a Good Retirement Investment Option?

Bonds Are Not Risk-Free

Because bonds are generally less volatile than stocks in the short term and can potentially provide a relatively steady source of income over time, they are often considered a “safe” asset class.

But bonds aren’t free of risk. No investment is.

Investors should be aware of important risks associated with bonds before including this asset in their investment strategy.

Potential Risks of Bonds

Here are some potential risks associated with bonds:

Credit or Default Risk: Credit risk, also known as default risk, is the probability a bond issuer will fail to make a principal or interest payment to the investor. If an issuer defaults on a bond, the investor can lose the entire principal investment and the anticipated interest payments.

Liquidity Risk: If an investor needs to sell a bond before it matures, bondholders may be forced to sell at a discount. This is called liquidity risk and can occur when there are no interested purchasers for a specific bond or simply not enough trading volume to receive the desired price.

Interest Rate Risk: Typically, a bond’s price moves inversely with interest rates. So as interest rates rise, bond prices tend to fall and vice versa. This means that the price of existing bonds drop to offset the more attractive rates of new bond issues. Longer-term bonds have greater price sensitivity to interest rate changes.

Reinvestment Risk: The possibility that cash flows from the original bond investment will have to be reinvested at lower rates, potentially reducing future income.

Inflation Risk: Generally, a bond’s interest payments are fixed for the length of the contract and may lose purchasing power in a rising inflationary environment.

Types of Bonds

Here are a few common categories in the universe of global fixed income securities:

Agency Bonds

Agency bonds are issued by divisions of the US federal government, or by government-sponsored organizations. Many have characteristics similar to Treasurys, in that the agency would presumably be backed by the US government in the event of financial trouble.

Corporate Bonds

Issued by a private or public company, corporate bonds can generally be broken down into two broad categories: high-yield corporates (also known as “junk bonds”) and investment-grade corporates.

Government Bonds

Government bonds are issued by a sovereign nation. These include US Treasurys, UK gilts, Japanese government bonds (JGBs) and German Bunds.

Municipal Bonds

These bonds are issued by cities, counties, states and other government entities. Interest on municipal bonds (aka “munis”) is generally not subject to federal tax.

Improve Your Bond Vocabulary

Bonds and fixed income instruments have their own terminology. Here are a few of the terms that bond investors should know:

Yield: The actual gains, or “realized return,” an investor earns on a bond over a specified period.

Duration: A measurement of a bond price’s sensitivity to changes in interest rates.

Maturity: The date on which a bond issuer must repay the principal amount of the bond to the bondholder.

Coupon: The annual amount of interest paid on a bond, usually expressed as a percentage, or “coupon rate.”

Issuer: A corporation, municipality, government or government agency that sells a bond to raise money.

Finding Your Optimal Portfolio Strategy

Fisher Investments doesn’t focus on any one asset class—we manage a variety of strategies including stocks, bonds, cash and other securities.

Your optimal portfolio strategy will depend on your investment objectives, time horizon, cash-flow requirements, outside income and assets, and any restrictions or customizations you may have.

Contact Fisher Investments today to learn more about bond risks and whether bonds are right for your long-term investment strategy.