Wednesday Wealth Recap
- Stocks responded positively to great news about Pfizer’s COVID-19 vaccine this week. Yet, as Alexander Green points out, not everyone is taking advantage.
- Nicholas Vardy explains how today’s top traders can teach investors a valuable lesson about making money in the markets… five valuable lessons, in fact.
- Chief Income Strategist Marc Lichtenfeld has always been a stock guy. But as he gets older, he’s found that bonds are what he needs for income and capital protection.
It’s no secret that I’m a stock guy – particularly dividend-paying stocks.
There are no investments out there that reliably grow wealth over the long term like stocks.
But in the short run, bonds – especially those of quality companies – are safer than stocks.
I Can’t Take Much Risk
Last year, I had to start paying college tuition. My wife and I diligently saved and invested for 18 years for this moment. Over these four years, we will pay an insane amount of cash to an institution of higher learning. And I’m not willing to take much risk with that chunk of money.
The closest you’ll come to a guarantee of getting your principal back is an investment in Treasurys. That being said, owning quality corporate bonds is a pretty safe bet.
Junk bonds, the riskiest corporate bonds, have had a default rate of just 2.6% per year over the past five years. That’s lower than the historical average of 4.2%, and the bonds most likely to default were the junkiest of the junk. Bonds rated BB, the junk bond rating closest to investment grade, had a default rate of just 0.18%.
Over the past 32 years, bonds with an investment-grade rating had a miniscule default rate of 0.1% per year. In other words, odds were 1 in 1,000 that these bonds would default. And no investment-grade bonds have defaulted in the past 10 years.
So your chances of getting your money back are extremely high.
When I invest in bonds, I’m not planning on selling them at a profit. If their prices go up and there’s an opportunity to sell them, great – but my bond positions are intended to produce income and protect capital. I expect to hold a bond until maturity.
I buy bonds with short maturities because I need the money soon.
I am creating a bond ladder where various bonds will mature in each of the next few years. I’ll earn some interest on the bonds while the money is invested, and each year, as the bonds mature, the money will become available to pay tuition.
While I love my dividend stocks, anything can happen in the short term. And if the market falls, I want to be able to buy more dividend payers.
Should the bond market tank in the next few years, I really don’t care. I don’t plan on selling my bonds, so the price doesn’t matter to me. When the bonds mature, I’ll cash them out.
Investment-grade corporate bonds are not risk-free, but they are a pretty safe way to earn some interest and count on all of your investment being available to you when you need it, as long as you time it right with the correct maturities. In other words, if you need the cash in April 2022, make sure your bond matures before then.
The good news is the bond market is so large that you shouldn’t have a problem finding bonds with the maturity date you want at the risk level you’re comfortable with.
If you can’t tolerate much risk on your short-term funds, investment-grade bonds are a great way to invest.