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What's the case for small investors to buy bonds? So I feel barely competent to purchase stocks, because there's honestly a lot of crystal ball holding involve

by ipsin 12y ago

What's the case for small investors to buy bonds? So I feel barely competent to purchase stocks, because there's honestly a lot of crystal ball holding involved. Is the company going to grow? Is that already priced in? Etc. It seems like bonds are case where the returns will be paltry or risky, and when risk is involved, the small investor will be least good at measuring that risk.

justincormack 12y ago
The market in general is not aimed at small investors, with some exceptions (governments usually have ways to buy their bonds, some tax freindly areas like munis in US are ok). Often minimum sizes are large, the documentation is complex, issues are all different, and so on.
galen211 12y ago
Diversification. Also, even if investors don't buy bonds, prices in the bond market still affect them. Treasuries represent the price of 'cash in the future' since they are risk-free assets. Everything from mortgage rates to the cost of credit for companies is fundamentally dependent on price discovery in the Treasuries market.
prostoalex 12y ago
Protection of principal with steady cashflow. It's equivalent to buying a long-term CD from the bank with a slightly better rate.
nandemo 12y ago
There are 2 ways to read your question. 1) What's the case for small investors to buy bonds, whether by buying them directly or via a bond fund? In this case, I recommend reading up on Modern Portfolio Theory and Asset Allocation or, if you just want practical information, just get a basic book like the Bogleheads guide. Basically, since stocks are risky, investors typically hold a combination of bonds and stocks. Also, because the returns for bonds and stocks are (somewhat) uncorrelated, a portfolio with a mix of bonds and stocks can have better returns with less risk (variance) than a 100% stock portfolio. Assuming your bond and stock holdings are diversified (e.g. you buy and hold index funds), the main long-term investing decision you have to make is the % you allocate to bonds and stocks. 2) What's the case for small investors to buy individual bonds instead of just investing in a bond index fund? Well, depending on where you are, you can buy government bonds without brokerage fees, so your costs might be lower. But in that case it's harder to invest the coupons by yourself. Of course bond returns are lower, but the risk is much lower too. In the case of short-term bonds issued by most developed countries, the risk of default is extremely small. The main risk is that unexpected inflation eats your returns.

by ipsin 12y ago

justincormack 12y ago

The market in general is not aimed at small investors, with some exceptions (governments usually have ways to buy their bonds, some tax freindly areas like munis in US are ok). Often minimum sizes are large, the documentation is complex, issues are all different, and so on.

galen211 12y ago

Diversification. Also, even if investors don't buy bonds, prices in the bond market still affect them. Treasuries represent the price of 'cash in the future' since they are risk-free assets. Everything from mortgage rates to the cost of credit for companies is fundamentally dependent on price discovery in the Treasuries market.

prostoalex 12y ago

Protection of principal with steady cashflow. It's equivalent to buying a long-term CD from the bank with a slightly better rate.

nandemo 12y ago

There are 2 ways to read your question. 1) What's the case for small investors to buy bonds, whether by buying them directly or via a bond fund? In this case, I recommend reading up on Modern Portfolio Theory and Asset Allocation or, if you just want practical information, just get a basic book like the Bogleheads guide. Basically, since stocks are risky, investors typically hold a combination of bonds and stocks. Also, because the returns for bonds and stocks are (somewhat) uncorrelated, a portfolio with a mix of bonds and stocks can have better returns with less risk (variance) than a 100% stock portfolio. Assuming your bond and stock holdings are diversified (e.g. you buy and hold index funds), the main long-term investing decision you have to make is the % you allocate to bonds and stocks. 2) What's the case for small investors to buy individual bonds instead of just investing in a bond index fund? Well, depending on where you are, you can buy government bonds without brokerage fees, so your costs might be lower. But in that case it's harder to invest the coupons by yourself. Of course bond returns are lower, but the risk is much lower too. In the case of short-term bonds issued by most developed countries, the risk of default is extremely small. The main risk is that unexpected inflation eats your returns.