When talking about investing for beginners, you need to be very careful when comparing equity funds to bond funds, as most beginners do not know the equity funds in bond funds. Think about it, most people who invested money with me when I was a financial planner didn’t understand their bond funds in particular. In 2014 and beyond, this could be costly.
Equity funds are a great way to invest for beginners who want to invest money in equities. Most people receive the concept and understand the risks involved. Bond funds are a different story. Most people who invest money in them tend to see these funds as very investor friendly. After all, in a recent period of 30 years, they have outperformed the performance of equity funds. Not only that, but they rarely had a bad year, while equity funds went through very difficult times.
In the last year, about a handful of my readers have been exempt from my warnings about bond funds versus equity funds for 2014, 2015 and beyond. Let me explain and simplify investments for beginners, because this is a topic of importance for all investors. After all, you need to hold both types of funds to have a balanced portfolio; and this should be one of the goals of every investor.
The issuance of equity funds to bond funds is indeed a matter of risk to potential returns. People understand that the former can be risky, but they accept this because they know that they can also be very rewarding. For example, equity funds had sports returns of about 30% in 2013. Since their 2009 lows they have increased by about 150%. For these types of returns it is worth taking the risk. This is the investment for beginners 101. The higher the potential returns … the higher the risk.
On the other hand, few average investors today understand the risk of issuing potential returns when applying to bond funds for 2014 and beyond. In fact, many have attached themselves to these funds. After all, they have been stable performers since the early 1980s and have paid attractive returns (dividends) to secure investments, such as bank CDs. At the same time, the share price (value) increased. The problem is that most investors do not understand the risk involved; and few understand WHY these funds were such good investments.
What I emphasize in investing for beginners 101 is that there are few things you can rely on in the investment world. For example, you can safely bet that there will always be uncertainty. And there is another general rule you can rely on. When interest rates fall, bond prices (and bond fund values) rise; and when interest rates rise, they fall. When I was a financial planner, I explained this to every client to whom I sold these funds. It has rarely been a problem, as interest rates peaked in 1981 and have fallen for almost 30 years.
Today’s average investor has never experienced an extremely high interest rate economic environment. Rates rose to historic highs in the late 1970s and early 1980s. Some investors had losses of almost 50% of their bond funds in 1981. These investments are unsafe, and the problem in 2014 and beyond is the prospect of higher rates. high interest rates. With almost minimal rates, this means you accept the risk of getting a dividend of about 3% a year in longer-term bond funds. In addition, the potential for rising stock prices (value) is disastrous, as interest rates may not even fall much.
Successful investments are always challenging, and investing for beginners can sometimes be scary. I think 2014 and beyond could be a scary time for investors. Our government has reduced interest rates to EXTREMELY low levels to stimulate the economy. Now, the powers that be are trying to cope with the collapse of the situation. Interest rates could rise more than expected.
In the debate on equity funds vs. bond funds, the main problem I see is that the risk against potential yields is not favorable to bond funds because potential yields are limited, as they have been in recent years. If the economy stops and interest rates take off, both may lose … both involve considerable risk in 2014 and beyond. Investment rule no. 1 for beginner investments: as interest rates rise, bond prices and bond fund values fall.
Don’t despair, investing for beginners can be a challenge. Remember this: the potential risk vs. profit makes investing money for higher returns a safer gain compared to securing and earning peanuts.