Joe and Al discuss four advantages of bonds.
Let’s start with the advantages of bonds. Right off the bat, I would say stability. You’re less likely to lose money in bonds than stocks; you still can lose money but you’re just less likely to. Number two is the income—the interest is paid regularly, and it’s often paid quarterly, sometimes twice a year, in some cases once a year but you know when it’s coming. When you own a stock, it may pay a dividend and often times pays quarterly but you never know the amount. Many stocks don’t pay dividends at all so at least with bonds you know you have a certain amount of income.
It’s a contractual agreement with the overall company, you’re loaning that money out to the organization or the government for a certain period of time–here’s my capital for twenty, thirty years, I’m going to receive a 5% interest rate, 2%, 3%, whatever interest rates are, you receive that coupon payment or that income payment and at the end of the term of the loan or the bond, you get all of your money back. So there’s some stability there, but then you have to take a look at alright, there are other advantages too, you might have some tax advantages with certain types of bonds. Or if you want to stay very, very safe, you might want to go with a treasury bond or a T-bill because that is one of the safest investments. But if you look at the 10-year treasury, it’s 2%. You’re giving your money to the federal government for 10 years for 2%, so you’re basically losing money on that transaction.
You have to compare all of your options to make sure–how does this all fit in your overall portfolio–and it basically starts with your goals, dreams, aspirations and so on.