Why do you have to own Bonds and why do you have to continue owning them?
It is important to understand how gains from Bonds can be realized so that the importance of keeping them in investment portfolios in the future can be understood.
There are two main profit components related to Bonds. When you purchase a Bond you are in effect lending money to the issuer at a predetermined rate of interest.
If the interest rates fall after you buy the Bond, the value of the Bond you’ve bought increases in value.
If the interest rates rise after you’ve bought the Bond the value of the Bond you own falls (because investors can now buy a Bond paying a higher rate of interest than the one you’re trying to sell).
Returns from Bonds represent the purchase of the actual Bonds and will always represent higher returns than those reflected in mutual funds that own Bonds as an asset of the fund.
That is due to the fees that are deducted by mutual funds that can really be substantial.
In spite of many claims by so-called “experts” that Bonds should be avoided, they have continued to perform better than most other assets.
Since the Federal Reserve began raising short-term interest rates, long-term interest rates have actually plummeted in reaction to developing weakness in the economy.
With Bonds there are still substantial profits to be made, while avoiding the volatility and danger of stocks that still remain grossly overvalued.
It is important to remember that the percentage gain to be realized if interest rates fall from 5% to 3% would be much larger than when the rates fell from 6.5% to 5%.
