Are Bonds Really Low-Risk Investments?
According to the Organization for Economic Co-Operation and Development, the market value of retirement savings fell by over $4 trillion during the great recession of 2008. Millions of investors all over the world scrambled to find a safe haven for their money. Traditionally, the safe haven has been bonds. Those who have decades of investing ahead are often advised to invest aggressively, while those closer to retirement or who have very low risk tolerance are guided towards bonds. Despite the conventional wisdom of this strategy, investors would do well to beware the risky aspects of bonds.
There is the general perception that bonds are safe; they are a stalwart soldier of the market that will help protect money even when stocks decline. Canadian bonds are currently considered to be about the safest in the world, but your portfolio may contain many other types of international bonds with different standards. The global market for bonds is many times larger than the market for stocks. A lack of control or oversight by banks, governments and institutions is always lurking.
Bonds are only guaranteed if they are held to maturity. They are usually purchased for portfolio balance or as an income producer. Either way, people are looking for stability. However the increase in demand for bonds since the 2008 crash has been overwhelming, and many feel the next bubble will be US bonds. This is certainly a risk factor that investors need to be aware of.
And finally it is also important to remember that inflation plays a role in the value of your bond at maturity. Say, for instance, you purchase a $100 bond that is guaranteed to mature in 20 years. But in 20 years, that $100 will be worth less than it is now because of inflation.
