Читать книгу Millionaire Expat - Andrew Hallam - Страница 21

Besides investing in stocks, smart investors choose bonds as well. When investing in bonds, individuals loan a government or corporation money in exchange for a fixed rate of interest. Bonds underperform stocks—not every year or every decade, but over the long haul, they do. But they aren't as volatile. An investor, for example, with the majority of his or her money in bonds issued by a developed country's government wouldn't suffer a 50 percent investment loss if the stock market dropped by half. In some cases, such an investor might gain money when stocks drop.

Investment portfolios composed of stocks and bonds are less volatile and more diversified than those made up solely of stocks. So they're safer. In the short term, investments get yanked about based on supply and demand. When demand for stocks is especially high (many more buyers than sellers), stocks rocket. But for stocks to rise so quickly, people would be buying them with abandon. Where do they get such money for their stock market purchases? Many pull proceeds from savings accounts, mattresses (if they're nuts), gold, real estate, and bonds. If enough money is pulled from gold, real estate, and bonds, these asset classes fall in price.

Their supply would exceed their demand. When stocks are roaring, investors selling bonds can force bond prices to drop. Always remember that short‐term asset class movements are a result of supply and demand. If more people are selling bonds than buying, supply outweighs demand. So bond prices fall. If more people are buying bonds than selling, bond prices rise.

You don't have to know the intricacies of how bonds work. Just make sure your portfolio includes a government bond index (which I'll explain later in the book). If, however, you want to know how bonds work, here it is in a nutshell.

There are a few different types of bonds, but I'll explain the most common with a story. Assume your eccentric Uncle James wants you to save, so he makes you a deal. If you give him $10,000, he'll invest the money for himself however he sees fit. You arrange for him to keep the money for five years. In the meantime, he gives you cash interest. He promises 5 percent per year. This is called a 5 percent coupon.

In this case, the yield is also 5 percent. Uncle James promises to pay you $500 annually. He pays it twice a year, $250 each time.

At the end of the five‐year term, Uncle James will return the $10,000. You will have recouped the $10,000, plus earned $500 for every year your uncle held your money.

But what if you had asked him to return the $10,000 before the end of the five‐year term? This is where Uncle James's quirkiness shines. He may decide to return just $9,800. Or he may give you a gift, handing over $10,300.

Uncle James guarantees he'll return exactly what you give him only if he's able to hold the money for the duration agreed upon. If you want the money early, the strange duck might return more than you gave him, or less.

Here's where Uncle James gets weirder. Assume that one year after you invested your initial $10,000 with him, your friend Amy wants in on the action. She approaches your uncle, who makes her a deal. “Amy, you can buy into the same scheme, but it expires in four years. This means you have only four years to earn interest, not five. I'm returning all of the money four years from now—yours (if you choose to invest) and my nephew's.” But bank interest rates have risen, so Amy starts wondering why she would invest with your uncle when the interest rate he promises is now lower than what she can earn elsewhere. “I'll tell you what,” says Uncle James. “If you invest just $9,500, I'll pay you $500 per year (equivalent to 5 percent of $10,000), but when the term expires in four years, I'll give you $10,000 instead of just the $9,500 you invested.”

In such a case, the investment's coupon is 5 percent of $10,000. It was the set interest rate on the initial $10,000 investment deal you made with Uncle James. But the investment yield is higher for Amy because she gets her $500 per year at a discount. She invests $9,500, will earn $500 per year in interest, and will receive $10,000 back at the end of four years. Consequently, her investment yields 5.3 percent per year.

If bank interest rates had dropped instead, Uncle James would have done something different. Realizing what a great deal he was offering compared to the dropping interest rates of the banks, he would have told Amy, “You can invest in this scheme. You will receive a 5 percent coupon on $10,000 but it will cost you $10,500, not $10,000. Therefore, your yield would be 4.8 percent, not 5 percent, because I'll return less than what you invested. It would still be profitable, of course, because you would receive $500 per year. But it would be less so.”

If you followed this strange little story, then you'll understand how most bonds work. Newly issued bonds have an expiration term and a fixed rate of interest. Investors purchasing such bonds when they're launched earn the same coupon and yield. If the interest paid amounts to 3 percent per year, this is what investors will make each year if they hold the bonds to maturity. If they sell early, they would receive more or less than what they deposited, depending on current bond prices. If they hold the bonds to maturity, they would receive exactly what they had invested, plus the cash interest they had earned twice a year.

Other investors can jump into a bond after the initial launch date. But if demand for bonds is high, they'll pay a premium for the bond. So their yield will be lower than the coupon rate that was advertised when the bond was launched. If demand for bonds is lower (this occurs when bank interest rates rise), bond prices drop. This increases the yield for new investors jumping into the same bond.