Do you remember when widows enjoyed respectable retirements from the income provided by “gilt” securities? I do. Yet, many people today do not. At a business conference that I attended recently, a young representative told me “I am thirty-five and I have never had to make this calculation before.” He referred to the relative risk and return expectations between stocks and bonds.
It is now 15 years since Ben Bernanke initiated quantitative easing (QE) in the United States. For most of the time since then, the Federal Reserve (Fed) has dominated the bond markets and kept interest rates stimulative, which favors risk assets such as stocks and real estate. The Fed made sure that nobody needed to make the calculation of whether they should take risks with their savings.
When I began in the financial industry, most investors bought bonds that they received in certificate form. These usually went into safe-deposit boxes until they matured. Few concerned themselves with the resale value since most people collected the interest until maturity. A $10,000.00 bond was exactly that. The primary concern was the issuer’s ability to pay. Great quality bonds were plentiful, a situation that changed with the invention of QE.
Paper certificates with a giant promise to pay a specific amount printed on the front are long gone. They shall never return. High rates have returned though, at least for now. Yet, I find in my discussions with clients that few of them understand how bonds work. This makes clients vulnerable to the unscrupulous.
To correct that situation, I have been working on a presentation that explains the basics of bonds. Soon, I shall do a live presentation online. Anybody who is interested should send an email to Angela. I do not mind doing as many presentations as it takes since our clients live in different time zones, particularly during the summer months. I shall keep it simple while hitting the important points and taking questions.