04 December 2015

Bond Trading: Risks and Benefits

What are the risks and benefits of Bonds trading?

​Managing your risk

Predictable Returns

If history is any indication, stocks will outperform Bonds in the long run. However, Bonds outperform stocks at certain times in the economic cycle. It's not unusual for stocks to lose 10% or​​ more in a year, so when Bonds make up a portion of your portfolio, they may help smooth out the bumps when a recession comes around.

There are always conditions in which we need security and predictability. Retirees, for instance, often rely on the predictable income generated by Bonds. If your portfolio consisted solely of stocks, it would be quite disappointing to retire two years into a bear market. An investor who still has many years until retirement may have plenty of time to make up for any losses from periods of decline in equities.

Debt Risk Vs Equity Risk

In general, investing in debt is safer than investing in equity. The reason for this is the priority that debtholders have over shareholders. If a company goes bankrupt, debtholders are ahead of shareholders in the line to be paid. In a worst-case scenario, such as bankruptcy, the creditors (debtholders) usually get at least some of their money back, while shareholders often lose their entire investment.

 

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products.
Please ensure you understand the risks.

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