Dear Mr. Market –
We are only a little over half way through this year yet you have already taken investors on a very interesting ride. From posting impressive results through the first half of the year and then allowing volatility to enter the market through various headlines and worldwide economic news you’ve certainly kept us all on our toes.
As investors look at their portfolios and their performance results we have seen one alarming statistic over the last month and half. In June alone individual investors took over $80 billion dollars out of their bond positions! Investors moved out of their fixed income positions quickly due to rising interest rates and to chase the impressive returns that the equity markets have been posting. Bonds are often treated as the ugly stepchild of investing but we find that they are typically not truly understood by the majority of investors. Lets take a moment to get a better understanding on the basics of fixed income investing and more importantly how and why they have a place in your portfolio.
Bonds/Fixed Income 101:
In their most basic form bonds are essentially a promise to repay money, with interest, on a certain date in the future. Think of them as an IOU where the borrower is obligated to pay the lender (the investor) a specified amount of money at regular intervals and then to repay the principal amount at the bonds maturity date. There are several different types of bonds available in today’s market, the following bullet points will focus on the most common ones: Continue reading