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Nancy Graham CPA, CA, CIM, CFP, TEP

Portfolio Manager
Contact
  • T613.237.5544 x 303
  • 1.800.230.5544
  • F613.237.5949
  • 265 Carling Avenue,
    8th Floor,
  • Ottawa, Ontario K1S 2E1
March-23-17

What’s the Scoop on Bond Values?

In my last “No Dumb Questions” video, we introduced some of the basic differences between stocks and bonds, which explain why each entails different sorts of risks and expected returns. Next, I want to take a closer look at bond values, and how the risks inherent to investing in bonds can affect those values.

Specifically, let’s consider this frequently asked question: “If bonds are supposed to be so ‘safe,’ why do my bonds or bond funds sometimes decline in value?”

 

The reason for the seeming paradox has to do with the fact that a bond is more than just a loan of your principal, with interest due. There’s also a “part two” to the story: Something we financial folks call a “secondary market,” where vast numbers of investors are buying and selling primary bonds based on their market values at the time.

If you hold a bond to term (and it doesn’t default on you), it ends up paying exactly as promised. That doesn’t change. But what about the value at which that bond would trade if you decided to sell it to someone else along the way? Just as the stock market is an efficient system for continuously setting – and re-setting – current stock prices, the secondary bond market determines how much your bond is worth at any given time.

Are bond valuations beginning to come into focus for you? Watch today’s video to learn more. And keep those future questions coming, while you sign up to watch more of my “No Dumb Question” answers.

By: Nancy Graham | 0 comments
March-09-17

What’s the Scoop on Bonds?

Stocks and bonds. You don’t have to be an investor for long before somebody suggests that you should have some of both. Bonds are supposed to be your financial safety net, while stocks are where you hope to earn your higher-flying returns … or so you’ve heard.

Okay, but what is it that makes bonds and stocks so different from one another, and how do these differences apply to your own investing? In today’s “No Dumb Questions” video, you’ll find out this and more about the bond side of your stock/bond portfolio mix.

It starts by understanding the basic structure of each holding

  • When you invest in bonds or bond funds – you are making a loan to a business or government agency; your returns come from the interest paid.
  • When you invest in stocks or stock funds – you are purchasing an ownership stake in a business; your returns come from increased share prices and/or dividends.

These essential differences are often lost in all the talk, talk, talk about yield curves and interest rates and Bank of Canada monetary policies. An yet, they actually explain nearly all of the reasons stocks and bonds behave differently from one another over time, and why it makes sense to hold an equal portion of both. Get a good feel for these basics, and you’re well on your way to making sense of what all that bond talk is all about.

 

The basic nature of stocks versus bonds also explains why each exposes you to very different sorts of risks and expected returns. Speaking of bond risks, another question I often hear is this one: “Nancy, if bonds are supposed to be so ‘safe,’ why do my bonds or bond funds sometimes decline in value?”

That’s a great question as well. So great, in fact, that I’m going to cover it in a video of its own, my next “No Dumb Questions” segment. Stay tuned for that!

By: Nancy Graham | 2 comments