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Bonds & Fixed Income Securities

Most investors have some portion of bonds in their total investment portfolio. Many financial advisors and retirement specialists suggest an average portfolio hold 60% equity and 40% bonds. The 60/40 split is a starting point for many advisors and they adjust this up/down based on the objectives and constraints of the investor and their age.

Characteristics of Bonds

  1. Coupon : - Most bonds pay a form of coupon periodically. The coupon can be either a fixed or floating rate paid by the issuer. The payment of the coupon can be monthly, quarterly, semi-annual, or annual.
  2. Principal : - Initially, the investor will purchase a principal of the bond for a specified price. The principal of a typical bond is paid back in full at the maturity date of the bond. There are many types of bonds that may periodically pay back portions of the principal over time, such as mortage backed securities who pay a portion of principal and interest each month.

1980's to 2017

Prices and yields move in opposite directions. So, raising rates will lead to falling prices. In a nutshell, over the past 37 years, the bond market has experienced falling rates, which has led to decent returns for bonds over this period. In the early 80's the 10-year treasury was north of 15% and today it stands at about 2.5%. What a dramatic change this has become.

What to do with low rates?

The question on every investors mind, is about what to do now that rates have fallen from such high levels? Essentially rates got close to a floor level, and they have hovered there for a few years. The typically investor in bonds needs to be concerned that if rates rise in the future, that their principal investment may suffer.

What to own in a low rate environment with raising rates expected?

  1. Stay on the Short End: Simply put, you will want to ensure that you stay on the short end of the curve. If rates rise and you are on the long end, you will lose more value of the bonds.
  2. Variable rates: If you invest into variable rate securities, they will be less affected by the change in rates up.
  3. Own Physical Bonds: You'll be best off if you own the actual bonds, and don't invest into mutual funds or ETF's. This is because when you own the physical bond, you can always hold it to maturity and get back all of your principal (assuming the company doesn't go bankrupt).

Don't get Trumped by your Bonds

Many holders of bonds on the long end of the curve are going to get "Trumped" by their holdings. If President Trump can achieve some of the goals that he is talking about, we will sure see higher rates at a faster rate than they rose under President Obama. Trump is trying to get GDP growth back up in the 3% range, and we are seeing signs of the economy starting to heat up slightly. With lower unemployment and slightly rising wages. Oil is up over the past years, and certain low levels of inflation are popping up around the globe. So, with a heating up economy, and increasing growth and increasing inflation, yields should be rising. The rising yields that may occur under a Trump presidency will not be welcomed by bond holders.


This list is not meant to be complete in any way, but just a few random thoughts about bonds and investing into them now as a private investor. Be sure to contact a professional before making any investment decisions or modifications to your portfolio.

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