My 1st Million At 33 – yes, you can do it too

Here are the major risk factors that will affect the bond performance:

1. Inflation risk:
   Your invested principal will most likely not be able to buy as much at the time of redemption due to years of inflation. Those are actual buying power lost. Don’t kid yourself that you can’t lose money when investing in actual bonds. Yes, all the money may be returned to you, but a $5 burger may cost you $10 much later. Your money dominated in the numbers of burgers would have lost 50% of its value. To me, this is really the one of the biggest risk.
2. Interest risk:
   The interest rate can go up and down during the time when your money is invested in bonds. When the economy weakens, the interest rates tend to go down because the inflation rate tends to go down. With less risk due to inflation, the price of bonds will go higher, and the yield goes lower. When the economy is strong, the interest rates & bond yields tend to go higher. As I have explained at the very top, you want to buy low and sell high (if not selling at the same price).
3. Currency risk:
   Instead of bonds in $US, issued by US government, municipals, or corporations, there are foreign bonds that you can buy (assuming you live in the US). The foreign bonds may have a higher or lower bond yield, depending on the inflation/interest rate in that particular country. Just to give you a general idea, Japan is at 0.25%, Euro 2.75%, UK 4.75%, Swiss 1.5%, New Zealand 7.25%, and US 5.25%. You may be able to get more interests if you invest in other countries. You can look at the world interest rate here. However, their currency may strengthen or weaken by the time when you decide to sell your bond, depending on the state of economy in that particular country at that time. You may incur a gain or loss due to currency exchange rate.
4. Credit risk:
   If the issuer defaults on the bond, or declare bankruptcy, your bond value will plunge in the trading market. If it’s bankrupt, you will be in the line of every creditor in the bankruptcy court.

In summary, when investing in bonds, it is always true that by taking more risks, you will get more interest yields. Risks are always proportional to the effective yields (on an after-tax and currency-exchage-rate adjusted basis). Risks for bonds include both credit risk, currency risk, and inflation/interest rate risk. Each factor of the risk should be carefully evaluated when investing in bonds for success.

At Fidelity, they have an excellent educational materials on fixed income investing or bonds. If you’re serious about investing in bonds, you should definitely take a look at their website.

Here are all the posts in the same bond investing series:

1. Intro to Investing in Bonds: Fundamentals
2. Intro to Investing in Bonds: How-to
3. Intro to Investing in Bonds: Risk Factors
4. Reasons for (Not) Investing in Bonds