Naples Florida Weekly
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Bond myths and misconceptions




 

Most top financial advisors will appropriately recommend that you allocate a material portion of your investment portfolio to bonds. This sound advice is rooted in widely accepted modern portfolio theory.

This article is not designed to undercut that advice, but rather to address concepts that many investors (and some financial advisors) believe about bonds that are inaccurate.

First, don’t assume bonds are safe simply because they are bonds. This is not always the case. Especially in difficult financial times, some bond investments can result in dramatic losses. As a result, good due diligence is just as important with bonds as it is with stocks.

Second, the “I will just hold until maturity” concept doesn’t apply with bond funds or bond ETFs (Exchange-traded funds). Most retail investors invest in bond mutual funds or bond ETFs and, if that is how you are investing in bonds, you are not investing in individual bonds that can be held to maturity.

VERNON

VERNON

Third, even if you are investing in individual bonds, understand that bond duration and bond maturity are not the same thing. In general, bond maturity is the date the bond will end, and the principal will be repaid (e.g. a 10-year bond will mature 10 years from the date it is issued), whereas bond duration is a complex analysis that is often used instead of bond maturity to measure interest rate risks. Unfortunately, bond duration can mislead investors regarding the true risk of long-term bonds. Be sure to consider bond maturities as well as bond duration when making bond investment decisions.

Fourth, the best way to buy individual bonds is usually not from a brokerage firm that “specializes” in bonds. Although there are exceptions, many of the brokerage firms that purport to specialize in bonds are actually taking advantage of investors in terms of bond prices and bond quality. I usually recommend that bond investors avoid the small broker dealers that loudly advertise their bond expertise. Regardless of whether you are investing in bonds to diversify your portfolio or investing in bonds to enhance your returns, keep the above concepts in mind as a bond investor. Remember, whatever it is, let’s make sure our money is working for us and not for somebody else.

Regardless of whether you are investing in bonds to diversify your portfolio or investing in bonds to enhance your returns, keep the above concepts in mind as a bond investor.

Remember, whatever it is, let’s make sure our money is working for us and not for somebody else. ¦

— Chris Vernon is an attorney with Vernon Litigation Group who represents clients in financial disputes throughout the United States. He is also licensed as a Registered Investment Advisor. Courts have accepted Mr. Vernon as an expert on investment related issues as both a lawyer and an investment professional.

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