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SAFETY IN BONDS? WHAT YOU SHOULD KNOW
09/14/2018

In a recent blog post, AAII’s Wayne Thorpe offers novice investors a quick explainer regarding bond risk. Big losses in the stock market can send investors scurrying for “safe” investments. But what is a “safe” investment? Stocks are risky because stock prices go up and down all the time—sometimes wildly so—and if you have money invested in stocks, the value of your original investment can drop substantially. In contrast, many investors put money in bonds to receive interest income and assume their original investment—their principal—will not change in value. However, this assumption is wrong! You can lose principal in a bond investment, and you can make money in a bond. This is true whether you hold them individually, or collectively in the form of a bond mutual fund. Bond prices go up and down for a number of reasons, but the biggest single factor is changes in interest rates. All bonds are affected by interest rate changes, regardless of the issuer or the credit rating or whether the bond is “insured” or “guaranteed.” HIGHLIGHTED EVENT: The FINRA Foundation and Future of Finance at the CFA Institute will be launching the findings of their study “Uncertain Futures: 7 Myths about Millennials and Investing” on October 4th at an event held at CFA Society New York. To register or view the livestream, click here.

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