While bonds are traditionally considered a more conservative investment than stocks, it is possible to lose money in bonds. Yes, you read that correctly. In order to protect your money while investing in bonds, be wary of the following:
Interest rate fluctuations — Bond prices decline when interest rates rise. If you incorrectly predict the direction in which interest rates are heading, you could lose money with your bonds. However, if you hold the bonds to maturity and the issuers don’t default, then you will get back the full face value of the bond regardless of interest rates in the marketplace.
Credit rating agencies — Companies and governments are both susceptible to downward ratings of creditworthiness by credit rating agencies. Bad earnings or a negative event might trigger downgrading by the credit rating agencies. Investors can lose money on a decline in the bond issuer’s credit rating.
Inflation — You will lose money if the earnings in your bond portfolio doesn’t outpace inflation. When inflation is high, consider using U.S. Treasury inflation-protected securities or inflation-linked corporate and municipal bonds. Even though these inflation-linked securities offer lower interest rates than non-linked issues, their linkage to inflation could protect your purchasing power.
Foreign currency exchange rate fluctuations — When there are unfavorable currency exchange rates between the country where you live and where the bond was issued, you may lose money.
Liquidity — Bonds tend to be less liquid than stocks, which means that if you need the money right away, you may have to sell the bond for a lower price than you would have expected, or you may possibly not be able to sell it at all.
Municipal bonds may not be tax free — Municipal bonds are complicated for Israeli citizens, since “munis” are taxable in Israel. The Israeli tax authority does not view these bonds as tax-free, so make sure that you update your portfolio when you leave the United States.
To learn more about bonds, watch this 15 minute clip I made: Profile-Financial.com/bonds
Published June 17, 2021.