People often turn to bonds as a safe investment vehicle but they do come with some inherent risks. One of those risks is liquidity risks, as the bond market is far less liquid than the stock market as there are fewer traders and investors, according to Adam Moeller, a retirement planner in Denver, Colorado. While government bonds can usually be sold quickly at an efficient price, corporate bonds, especially junk bonds, can be tough to unload.
Inflation risk is also associated with bonds and while at the moment, inflation is mild, Moeller cautions it won't be that way forever. He believes it's the biggest risk associated with bonds. Lastly, there is the re-investment risk and when the economy slows down, interest rates decline and bond investors face a different problem there. As their bonds mature, they're forced to re-invest their interest earned and any other principle they get back and securities with a lower rate of return. This reduces the income being generated by their bond portfolio.
With the current bond bubble, those with a lot invested in bonds are wondering what to do. Moeller says a lot of that money is flowing into fixed and hybrid annuities, which will perform just like bonds did over the last 5-10 years without the risk.
Adam Moeller can be reached at 720-974-4800 or at myajmfinancial.com. He spoke with Retirement News Today, providing online retirement video news content. Retirement News Today is a featured network of Sequence Media Group.