Are Your Bonds Safe?

by Manisha Thakor

"Last year I invested in a bond fund and now I've lost money. What happened? I thought bonds were supposed to be safe investments!" 

Recently several people have asked me this same question. Given the turbulent economic times we're (hopefully!) coming out of, it's understandable that folks want to find a "safe investment" to hunker down in.

Alas, the phrase "safe investment" is an oxymoron. The whole point of investing is taking on some risk with the hope, but not the guarantee, of earning a higher return than you'd get from doing something risk free.

So how did bonds get the reputation of being "safe?" Well, at their core, bonds are loans. You lend money for a pre-determined period of time. In return you receive interest at specified intervals. When your loan (a.k.a. bond) matures you get back the money you originally loaned - if the entity hasn't gone bankrupt.

It is the return of that original investment that has caused people to view bonds as "safe" investments. Alas, there are always risks with any investments. The two classic ones for individual bonds are:

  1. Credit Risk: This is the risk that the entity you lend to goes belly up and can't pay you back.

  2. Interest Rate Risk: Bonds are like seesaws. When interest rates go up, the price of bonds go down. If you hold your bond until it matures, the impact is all on paper. But if you are forced to sell your bond before its maturity date and interest rates are higher than when you bought that bond, the price you'll receive will be less than you originally invested.

Another problem with individual bonds is you often need a pretty hefty chunk of change to buy them. This is where bond mutual funds come in. For example, if you had $10,000 to invest you might be able to buy one bond. But by pooling your money with other people's money, bond mutual funds enable you to take that $10,000 and spread it out over many different bonds. That helps you spread out your risk.

However, when individual investors decide to take their money out of a bond fund, the portfolio manager may be forced to sell bonds at less than desirable prices to give them back their money. You could call this liquidity risk. Over the past year, as interest rates have inched up and there have been concerns about credit quality, the price of some bond funds has declined as these risks all reared their heads.

What does this mean for you? It means that like stock funds, bond funds also have some risk associated with them. They should not be thought of as "100% safe" substitutes for FDIC insured savings accounts. Rather, they are intended to be part of a well-balanced portfolio. Another way to keep your risk low is to invest in bond funds that have average maturities of 5 years or less because they seesaw around less violently as interest rates move.

What additional questions do you have about bonds or bond funds?


Want more financial love? You can follow Women's Financial Literacy Initiative founder, Manisha Thakor, on Twitter at @ManishaThakor or on Facebook at /MThakor.

Comment /Source

Manisha Thakor

From Manisha's linkedin profile page:

Manisha Thakor is the Director of Wealth Strategies for Women at Buckingham Strategic Wealth and The BAM Alliance. 

Manisha and her colleagues provide both evidence-based wealth advisory services for high-net-worth households and core asset management solutions for women and families nationwide with $80,000 or more in investible assets. 

An ardent financial literacy advocate for women, Manisha is the co-author of two critically acclaimed personal finance books: ON MY OWN TWO FEET: a modern girl’s guide to personal finance and GET FINANCIALLY NAKED: how to talk money with your honey. She is on Faculty at The Omega Institute and serves as a Financial Fellow at Wellesley College. Manisha is also a member of The Wall Street Journal’s Wealth Experts Panel, a member of the 2015 CNBC Financial Advisor’s Council, and wearing her financial educator’s hat serves as a part of TIAA-CREF’s Women’s Initiative. 

Manisha's financial advice has been featured in a wide range of national media outlets including CNN, PBS, NPR, The Today Show, Rachel Ray, The New York Times, The Boston Globe, The LA Times, Real Simple, Women’s Day, Glamour, Essence, and MORE magazine.

Prior to joining the Buckingham team, Manisha spent over twenty years working in financial services. On the institutional side she worked as an analyst, portfolio manager and client relations executive at SG Warburg, Atalanta/Sosnoff Capital, Fayez Sarofim & Co., and Sands Capital Management. After this she moved to the retail side and ran her own independent registered investment advisory firm, MoneyZen Wealth Management. 

Manisha earned her MBA from Harvard Business School in 1997, her BA from Wellesley College in 1992 and is a CFA charterholder. She lives in Portland, OR where she delights in the amazing Third Wave coffee scene and stunning natural beauty of the Pacific NorthWest. Manisha’s website is MoneyZen.com.

Ladies, Should You Ask For It?

by Manisha Thakor

Quick - what was the first thing that came to your mind when you read the title of this post?

What about "Gentleman, should you ask for it?" Would this change your response? For many people the female-oriented title raises sexual connotations while the male-oriented iteration conjures thoughts of money and power. 

For the record, in both cases I am talking about asking for raises at work. This is a subject that has long made my stomach churn.  As a natural people-pleaser-and-avoider-of-conflict, I've preferred to work hard and hope my results will speak loudly for themselves. Turns out I'm not alone in this. 

Recently I talked with Carnegie Mellon Professor Linda Babcock, coauthor of "Women Don't Ask" and "Ask For It," two fantastic books on why and how working women should negotiate salaries.  (Professor Babcock is also very involved with motivating young girls. Thanks to her, the Girl Scouts now have a badge for negotiation skills).  Here are two of the many eye-popping statistics from Professor Babcock's work: 

  • Avoiding negotiating your first salary can cost you $500,000 by age 60 (oh, and men negotiate their first salaries 4x more often than women).

  • Women who consistently negotiate their salaries throughout their careers typically earn $1 million more in lifetime career earnings than women who don't.

So what motivates negotiators? Locus of control. Professor Babcock observes that people who negotiate tend to have a worldview that is more "optimistic than fatalistic, malleable versus fixed." Psychologists have noted that men consistently - across countries - have a higher propensity to see "the world as their oyster" than women.  Ergo, more men negotiate than women.

Alas, her research also shows that, "Men can behave anyway they want when they negotiate, but people have a strong preference for how women negotiate. Direct and aggressive doesn't work." For women a "more cooperative and relationship oriented" approach tends to be more effective.  When women adopt a bold can-do attitude they are often met with a "visceral reaction to strong women" and perceived as being not nice. Clearly, for women to achieve lasting pay parity, this has to change... but that's a whole 'nother topic.

Let's get back to how this discussion can improve your life now

This gut-wrenching economic environment may not seem the obvious one in which to rock the boat. But it's also an environment when employers can't afford to lose their best people. An innovative new website called GetRaised.com can help you make the most of your current situation.  With a few mouse clicks it will tell you if you are underpaid and for an additional $20 it will prepare a custom raise request that you can use to negotiate.  If you don't get a raise in 6 months you'll get your $20 back.  The company currently pegs the average raise received by users at $3,078. Not a bad return on $20.

What about you?  Have you ever asked for a raise and if so, how did it go?


[Want more financial love? You can follow Women's Financial Literacy Initiative founder, Manisha Thakor, on Twitter at @ManishaThakor or on Facebook at /ManishaThakor.

Comment /Source

Manisha Thakor

From Manisha's linkedin profile page:

Manisha Thakor is the Director of Wealth Strategies for Women at Buckingham Strategic Wealth and The BAM Alliance. 

Manisha and her colleagues provide both evidence-based wealth advisory services for high-net-worth households and core asset management solutions for women and families nationwide with $80,000 or more in investible assets. 

An ardent financial literacy advocate for women, Manisha is the co-author of two critically acclaimed personal finance books: ON MY OWN TWO FEET: a modern girl’s guide to personal finance and GET FINANCIALLY NAKED: how to talk money with your honey. She is on Faculty at The Omega Institute and serves as a Financial Fellow at Wellesley College. Manisha is also a member of The Wall Street Journal’s Wealth Experts Panel, a member of the 2015 CNBC Financial Advisor’s Council, and wearing her financial educator’s hat serves as a part of TIAA-CREF’s Women’s Initiative. 

Manisha's financial advice has been featured in a wide range of national media outlets including CNN, PBS, NPR, The Today Show, Rachel Ray, The New York Times, The Boston Globe, The LA Times, Real Simple, Women’s Day, Glamour, Essence, and MORE magazine.

Prior to joining the Buckingham team, Manisha spent over twenty years working in financial services. On the institutional side she worked as an analyst, portfolio manager and client relations executive at SG Warburg, Atalanta/Sosnoff Capital, Fayez Sarofim & Co., and Sands Capital Management. After this she moved to the retail side and ran her own independent registered investment advisory firm, MoneyZen Wealth Management. 

Manisha earned her MBA from Harvard Business School in 1997, her BA from Wellesley College in 1992 and is a CFA charterholder. She lives in Portland, OR where she delights in the amazing Third Wave coffee scene and stunning natural beauty of the Pacific NorthWest. Manisha’s website is MoneyZen.com.