Are Bonds Really a Good Investment?

One of the biggest lies told on Wall Street is that bonds are a good investment and should represent a substantial portion of a typical investor's portfolio, according to John Talbott's 2009 book

. The question is, does Talbott have a valid point? Talbott says that most financial advisors will tell you that at least 45 percent of your portfolio should be bonds, with the rest split at 45 percent common stock and 10 percent real estate. He also quotes the commonly-held belief that you should hold your age ion bonds, so the older you are, the greater the percentage of bonds in your portfolio. The financial advisors will say this because they believe that bonds are a safe bet because for a bondholder to see a loss, the company in question would have to be threatened with bankruptcy. But there is the key. The magic word is “threatened”. A company does not necessarily have to go full-on bankrupt for the bonds to lose money, but the threat of bankruptcy has to be hanging over its head. In this economic climate, that would apply to many, many companies and it will apply to many more in the near future. Conversely, if a company starts do well faster than previously expected; the bondholder will only get the promised rate of return. So it's kind of like a low interest savings account at the local high street bank, except that the risks are greater. So are, as Talbott suggests, investors basically fooled into purchasing bonds with some false sense of security? The name “fixed income securities” certainly sounds attractive to people seeking a secure retirement package, but if the security is virtual at best and the fixed income is no such thing, then what are the real benefits? There are better options out there that are often being ignored thanks to fear-mongering. But the down-sides do not stop there. Tax can be taken from the interest of these fixed income securities as if it is regular income. So really, where is the benefit? Talbott is quite right. People are being fooled into buying bonds out of a desire for security, and they are ignoring better options with a similar amount of risk (or lack of) and better interest. Bonds are right for some people, but be sure you are one of them before purchasing.