LOS ANGELES, Sept. 28, 2019 (GLOBE NEWSWIRE) -- MarketReview.com, a leading finance information website recently released a report on relationship between bond yields and stocks investing. According to the report, there are two main reasons why people invest in bonds, which are to seek income and to seek the lower risk that bonds involve overall versus stocks. More conservative investors will therefore prefer bonds more.
According to the report, the big error that the income seeking investors make is focusing on the interest-bearing component of bonds while neglecting the impact of movements in price. Unless an investor is buying the bonds himself and always holding them to maturity, price will matter and may matter a great deal.
Many investors do not hold bonds to term or invest in bond funds that do not, and therefore they are subject to capital gains and losses in addition to earned interest. Since price matters, ignoring price as these investors are prone to do will not provide correct guidance with these investments.
Ken Stephens, Chief Editor of MarketReview.com said, “An example would be investing in bonds with today’s high prices, with little potential to the upside but quite a bit to the downside. This can increase the risk of bonds to a level even comparable with stocks, without enjoying the far greater upside stocks have generally.”
According to Ken, the other main purpose, using bonds as a blanket hedge, involves the mistake of looking at the risk of bonds over a long period of time and not accounting for the particular level of risk at the present time. Today’s bond markets also provide a great example of this, where bonds now are quite risky indeed even though they may be less risky on average over long periods of time.
The report states that the additional risk that bonds have is easily measurable, and one can just look at yields where lower yields involve more risk. As these yields naturally gravitate toward more normal levels, this involves bondholders taking on capital losses in proportion to these moves. If investors are looking to hedge risk, they need to pay attention to the risks of the hedge as well. The low yields of today don’t just indicate lower interest relative to the purchase price, they also indicate higher risk and make buying bonds less preferable than owning stocks then if yields were higher.
This is the real reason why stocks tend to be more preferable to bonds when bond yields are lower, explains MarketReview.com, because this means that bonds are overbought and subject to a reversal in price, and when the price goes down, money gets lost.
About MarketReview.com: MarketReview.com provides their readers with cutting-edge insights on all matters related to personal finance & investing. Their goal is to not only inform but educate, and provide a level of education that well exceeds what is found in the popular media.
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Ken Stephens, Chief Editor
ken@marketreview.com
