When Bonds Are Not As Safe As You Think…

I was having a small debate recently with a financial adviser friend regarding portfolio allocation and the place of bonds in a portfolio. The main point of the debate was whether measuring the investment risk of the portfolio by the ratio of bonds to stocks/equities was at all practical.

Bonds are basically debt instruments by the issuers. In simpler words, an IOU. By buying a bond, bondholders are lending their money to the issuer, in return for interest.

Bonds vs Stocks

Most investors who buy into bonds are going after the “guaranteed static yield” that bonds provide. While it may seem many people think that bonds are thought to be safer due to this “guaranteed yield” and lessened volatility, it is nowhere near safe as people think them to be. This is in contrast to what many financial advisers and professionals will claim. In fact, it’s pretty common for advisers to measure the investment risk in a portfolio by the ratio of bonds to stocks. Read the rest