Why do you buy a house? I don’t have any empirical evidence to back this statement, so know that I am assuming the majority of people buy a house for shelter. Sure, there are people who buy and flip properties for potential gain, but I’m presuming almost all purchases are intended to provide shelters for families.
So why a house versus an apartment? A house not only provides shelter, but it is a viable means to build equity and in certain cases, provides appreciation over time.
If real estate values happen to go down in an area or during a moment in time, do homeowners quickly sell their homes? I’m going to postulate that the answer is no. After all, regardless of market price moves, that house is still providing a family with shelter. That house provides more to its owner than just its potential appreciation value.
Why do you buy a bond? First and foremost is its ability to protect principal. In other words, if I have a million dollars today, I want to be reasonably assured I have at least a million dollars tomorrow. Cash would bring similar assurance but bonds also provide a viable means to build returns and in some cases, even appreciation.
As a matter of fact, the tremendous appreciation that bonds have provided over the last couple of decades has impaired vision of a bond’s purpose for many investors: principal protection with reasonable capacity for income generation.
It is easy for investors to get off track and even comingle asset purchase purposes especially when one asset class is in a moment of time where endless benefit seems imaginable. Appreciation is a primary component of return for many other asset classes. But many of those asset classes do not have a promised date they will return principal. In fact, there is no promise that any principal will be returned.
Disciplined investing dictates asset allocation and with good reason. As the equity markets hit record highs on a regular basis, it is important to remind yourself why you allocate a percentage of your assets to fixed income. Most important is protecting the wealth you just accumulated. Fixed income is also an allocation that has a promised return of principal and a promised means of income. Appreciation is of course welcome, but not a necessary component for bonds to perform their primary purpose.
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of investinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
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