Do You Have This Common Misconception About Bonds?

A bond certificate
Bonds have their place in an investment portfolio when market conditions are right. However, even in the right market conditions, many people have a misconception about bonds that is not good for their financial health.

Let’s look at what that is.

A bond is simply you loaning money to a corporation for a certain period of time, so they will pay you interest. For example, you might buy a ten year bond for $1000 that pays 5% interest.  When you buy the bond, you have loaned that money to the corporation.

Many people mistakenly believe that they can’t lose the original $1000 bond investment they made.  That is the misconception.  It is ONLY TRUE if you hold it to its maturity date (in this example 10 years).

What surprises some is that the price and value of a bond goes up and down just like the price and value of stocks in the stock market.  So if you bought a ten year bond, and decided to sell it a year later, it may only be worth $600 — or it may be worth $1200 — all depending on current interest rates and how badly people want to buy your bond.

Why is that, you may wonder.  Well, if interest rates went up and the company issued some more bonds that paid 10% interest, everyone would want to buy the new bonds because they paid twice as much interest.  Remember, the bond you bought and own only pays 5%.  So they won’t be interested in buying your bond for the full $1000 you paid because they can get a much better deal today.  So they will offer much less than $1000 to buy your bond.

Bonds are typically a little more difficult to buy than stocks where you can place a buy and sell order and have it execute in seconds and begin to see results immediately.  For this reason and others, they are not in the scope of this book.

I’m not against bonds if they are done correctly.  Indeed, one of the financial newsletters produced by Stansberry & Associates Investment Research does incredibly well with them by buying them at deep discounts.

But most people don’t buy with this kind of research.  They just mistakenly buy them assuming they are safe investments, and this is not always the case.

So be sure and remember this about bonds before you buy them.

To your health and prosperity – John

P.S. The bond newsletter I referred to above is called True Income.  You can find out more about it at if you are interested.

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