Many investors have sought shelter from the stock market storm in more mature dividend-paying companies since the income from these firms provides at least some positive return in an otherwise bleak environment. What signs can you look for that indicate the safety of a company’s dividend payment stream?
Bonds play a role in a portfolio, even when the outlook for interest rates is uncertain. They offer a lower level of volatility than stocks. Plus, bonds have historically had different return characteristics. Determining how to best get exposure to them can be a challenge, however, as there are advantages and disadvantages to choosing between bond funds and individual bonds.
While people speak of the bond market as if it were one market, in reality there is not one central place or exchange where bonds are bought and sold. This market is so vast that its size is difficult to imagine. Overwhelmingly, this is an institutional market. The individual investor faces many disadvantages when compared to institutions. In order to protect your interests, if you want to buy individual bonds, you need to become an informed investor, and you need to stick to bonds whose characteristics and risks you understand.
Stocks are risky because stock prices go up and down all the time—sometimes wildly so—and if you have money invested in stocks, the value of your original investment can drop substantially. In contrast, many investors put money in bonds to receive interest income and assume their original investment—their principal—will not change in value. However, this assumption is wrong! You can lose principal in a bond investment, and you can make money in a bond. This is true whether you hold them individually, or collectively in the form of a bond mutual fund.
Our Member Question for this week is:
How satisfied are you with the services provided by your broker?
Vote to answer this week’s Special Question: What was the primary reason for choosing your brokerage firm(s) (i.e., cost, research offerings, investment offerings, etc.)?
Last Week’s Results:
Poll results are as of 9 a.m. (Central) on Monday. 931 respondents.
As we continue along the path of the “longest” bull market in U.S. history, investors are finding it increasingly difficult to find securities to invest in with valuations rising above historical norms while interest rates remain near record lows. Against this backdrop, we asked our readers how the current market conditions have affected their attitudes on diversification. We also asked whether they are looking for new ways to diversify their portfolios.
There is widespread misunderstanding about what credit ratings really mean, and how they affect the returns that you earn and the overall riskiness of your portfolio. This AAII Investor Classroom attempts to clear up some of this misunderstanding to help you make better investment decisions.