Are Bonds Really Zero-Risk Investments?

Written by Pete Schnepp

Bonds are often touted as being very low-risk investments. Some would even go so far as to call them risk-free. But is that really the case? All investments come with risks to balance out their rewards, and bonds are no different. Here are a few of the risks you take on when you invest in bonds.

Interest Rate Risks

This is one of the best-known perils of bonds. The relationship between a bond and the interest rates in the market are complicated, but basically, supply and demand are at play in influencing the interest rate on the bond. A bond you invest in might decline in value if interest rates rise. Yikes!

Inflation Risks

A bond is worth a fixed amount of money. If you invest 10,000 dollars in a bond, when it’s paid back to you, you’ll get 10,000 dollars. Seems straightforward and risk-free, right? Nope!

You must remember that inflation is a factor in every economy. 10,000 one year is unlikely to have the same purchasing power five years from the date the bond is issued. In that way, there’s a good chance your bond is going to decline in total value, and that means money out of your pocket.

Default Risk

If you invest in bonds for a corporation, and that company goes under? Who knows what you’ll be getting back. If the bank repossesses the assets of the company you’ve given your money to, well, that’s simply not your money anymore. It’s gone.

Takeaways?

Bonds aren’t the riskiest investment, sure, but they do come with their own set of risks. And that low risk deal that you think you’re getting also tends to come with low value and minimal rewards. Bonds aren’t a terrible investment, but they’re not necessarily the best one.

Real estate, on the other hand, is a great investment choice for anyone who wants to see their wealth grow surely and steadily. No matter what happens, if you invest in real estate, you can rest easy knowing that there’s a solid piece of land behind your money.