Happy Valentine's Day Eve! Did you know that this "holiday" tradition started back in the days of the Roman's as a festival called "Lupercalia?" Here's an interesting two-minute video on Valentine's Day Facts from this history channel
Also, for my Corning, New York clients - are you still looking for that last minute gift to give to your sweetheart? Well there is nothing better than going to dinner for a cause! Please see the attached flyer for information on the Corning Community Food Pantry's annual Spaghetti Dinner to be held on Saturday, February 25th - buy your sweetheart a ticket for Valentine's day!
You may recall from last week's blog, in late January, I had a great conversation with a client about "learning" how to invest so that our conversations would be more engaging. This prompted me to ask a few more clients if they would be interested in an investment 101 series for the month of February; the feedback I received was a resounding YES. So, I decided to break the series down into four-parts:
What exactly is a bond? This weeks topic
What is a mutual fund?
What is the difference between a mutual fund and an exchange-traded fund?
People often think of bonds as a "safe" haven. I caution those general thoughts because bonds can have just as much risk as stocks, sometimes more. According to The Wall Street Journal (http://guides.wsj.com/personal-finance/investing/what-is-a-bond/), "Bonds are a form of debt. Bonds are loans, or IOUs, but you serve as the bank."
Sticking with the quote of the day, bonds can come in all levels of maturity - from "ripe" to "green." Here's a quick reference chart to keep in mind:
Banana = Bond
Ripe Bananas = Short-Term Bond Less than 3 years to Maturity
Not fully Ripe, but not Green Bananas = Intermediate-Term Bond is 3 - 10 years to Maturity
Green Bananas = Long-Term Bond - 10+ Years to Maturity
Additionally, they can have different "risk" associated with them. Think about this in the form of a banana peel - where you put the peel can reduce risk, or increase it:
Banana Peel = Bond*
Put the peel in the garbage - Low Risk, not likely to slip on the peel
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Bonds with high "credit scores" and very likely to pay both the interest and the principal when the bond matures.An example would be US Government Bonds.
Leave it on the counter, could fall of the counter, but not likely, so not likely to fall and get hurt (but not guaranteed either)
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Bonds with good "credit scores" and likely to pay back both the interest and principal, but has some risk.Often you will see them termed as "investment grade bonds> An example of this would be a corporate bond such as Comcast Corp New 6.95%.
Toss it on the floor, could slip and fall and get hurt
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Bonds with lower "credit scores" and they are considered higher risk.Often you will see them called "high yield bonds."They have to pay a higher yield because you are taking a higher risk.Think of this category some what like loaning money to your kids - some will pay it back, some will take longer to pay it back than originally defined, and then some won't have the ability to pay it back after all.
* Here is an article on bond rating that you might enjoy:
http://www.investopedia.com/terms/i/investmentgrade.asp
In addition to the above, bonds can be both domestic and foreign in nature, just like stocks can be; and they can be from developed countries (which usually have lower risk) and from emerging countries (which usually have higher risk).
Overall, I'm currently recommending that folks keep their bond exposure short in duration (ripe), with the peel on the counter (investment grade). In addition, I like corporate bonds and I've been adding some emerging market debt to some of the portfolios (PRESIDENT TRUMP has indicated he wants the dollar to weaken, which would boost U.S. exports and be a relative positive for EM currencies).
So that's my brief explanation of bonds - let me know what you think and if you have any questions.
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