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Understanding Fixed Income Investments

Why Bonds are Riskier than Stocks

Following Warren Buffett’s lead in his shareholder letter of the last two years, I have been talking about the riskiness of bonds — or more particularly, the riskiness of fixed income investments.

There are really only three kinds of investments: Fixed Income, No Income, and Rising Income.

We could further simplify and say that rising income investments are productive investments. And what are they? Businesses (or shares of those businesses) and real estate that produce rising income.

fixed income investments

Of course, bonds are fixed income investments and are susceptible to losing your purchasing power over time to inflation – the biggest risk for savers. After all, the reason we invest is to maintain at least, or better, to grow our purchasing power in the future.

Jeremy Siegel below makes the case against bonds, especially after a 30-year bull market in which interest rates dropped from the mid-teens in the late ’70s and early ’80s to 2.5% this morning.

“Certainly under current monetary policy, the risk that inflation will once again be a concern for policy makers is high. In that situation, Treasury bonds will cease to be a hedge asset, and bond prices could fall substantially, since investors will require much higher yield for an asset that no longer acts as a diversifier to the equities in their portfolios.”

—Jeremy Siegel, in the new fifth edition of Stocks for the Long Run, page 52

What to do If Your Money’s in Bonds

Now’s the time to start making the transition from bonds to stocks.

The first step is selling your bonds — and investing more of your money in stocks of great companies.

My company ValueAligned Partners has been helping investors — both experienced and inexperienced alike — save enough to retire comfortably simply by investing in stocks of great companies via separately managed accounts.

Sign up for my helpful email newsletters for access to more stock investing tips, and contact me at david@www.valuealigned.com or 732-800-2375 if you have any questions or concerns at all.