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Charlie | You own a portfolio consisting of $250,000 worth of long term US bonds; would your portfolio be riskless? |
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muncie birder
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No. The portfolio is subject to interest rate risk and inflation risk. Both very serious. Another risk that is seldom mentioned is tax risk. Also very serious. |
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alcaholicrage
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Your portfolio would have no credit risk. When the bonds mature, you will get all your principal back. (If you dont, it means the US government has completely collapsed, and you probably have bigger problems to deal with)
If you are holding the bonds to maturity you would not be subject to interest rate risk. If you are holding a bond to maturity, and you are guaranteed to get your principle back, its current valuation is meaningless to you. If you are planning on trading the bonds before maturity however, a long term bond is very subject to interest rate risk, especially if you buy them now in a historically low interest rate environment)
You would be at risk for inflation (you get a fixed payment, things start to get more expensive - your buying power decreases)
You would have reinvestment ris. Your funds are not available to invest at a higher yield if one should become available. This is also known as opportunity risk. |
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BangkokBob
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If your intent is to hold these bonds until they maure, then YES, it is riskless. If you intend to sell them or if you have to sell them, then remember that the bonds trade everyday and fluctuate in price so the price might be higher or lower than what you paid and therefore you might make a profit or incur a loss. |
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J
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no investment is riskless. With US gov bonds you are pretty much assured of getting your investment back- but that doesn't mean you aren't taking a risk.
If inflation went to 10% a year by the time you got your us bond investment back it would almost be worthless. The us dollar is falling compared to other countries - so again when you got your long term investment back you might find it was worth a lot less. Right now interest rates are low and there is not much difference between short term and long term rates. So investing 250k in 20 year us goverment bonds would pay a little over 5%. You would be locking yourself at that low rate for 20 years. If interest rates go up then the value of your us goverment bonds would go down so if you needed to sell before the 20 years were up then you would not get back 250k. If the interest rates go down the investment would be worth more.
Most advice for those investing for the long term is to spread your investment among large, small and foreign stock and a variety of long, short and even inflation protected bonds and money market funds. By spreading it among these different types you avoid having all your eggs in one basket. It isn't as safe since your can't be sure that you will get your 250k back but in some ways it is less risky. |
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zyberianwarrior
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not really you are risking it on the US Govertment who's dollar is at all time lows. But you'll also have a low yield on them. |
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dluo
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Absolutely not.
Risk typically means the chances of getting a lower than expected return. The only things that are risk free are US Government Strips (zero coupon bonds) held to maturity, and bank deposits of $100k or less. If you add currency risk into the picture, than by definition, nothing is risk free.
Every thing else carries risk. |
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mister ed
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no only bank accounts under 100k are completely risk free |
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