15 August 2012

Are bonds and gilts too risky?

If you talk about investing to someone, they generally assume shares - otherwise known as equities. That's when you buy the shares of commercial companies and become a part owner of the business, entitled (usually) to any dividends the company pays out, as well as to the change in the share price - hopefully an increase not a decrease!).

But in terms of the sums involved, the other main area of investment is much much larger: Bonds. Those are "fixed interest" investments where the issuer - either a company or a government - promises to make regular fixed interest payments for the life of the bond, and then to give you your original money back at the end of the term. You can also buy and sell at market rates during the life of the bond.

Bond investing used to be the norm, with equity investing seen as too risky. But the big enemy of successful bond investing came along: inflation... the value of the fixed interest payments you receive reduces if inflation increases. Hence the rise in popularity of equities.

But even ignoring the inevitable return of inflation at some point, bond investing is no longer the "invest and forget" option is used to be. The economic situation is causing anomalies such as the "flight to quality" which means that Government gilts have been in demand, increasing their price. So moving your pension plan into gilts a few years before retirement to give you some stability is not necessarily the right move, since they could head downwards again without much notice.

The bottom line is that a diversified approach is really the only way. Along with regular reviews of what your investment portfolio includes you should have some hope - but no guarantees - of staying ahead.

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