Riding in the car with my dad on our way home from church, the 10 year old me decided to impress my dad with the investment advice I learned from my friend's father in Sunday school. "Dad, invest in dot-coms. In the future everything is going to be on-line. It is a guaranteed investment." I smiled looking for approval. My friend's dad had just quit his job, they were moving to California.
"Nelson, there is no such thing as a guaranteed investment. All investments have a risk hidden somewhere."
Fixed income investments sound safe. When an investor purchases a bond, they are issuing a loan in exchange for receiving the monthly income from the payments. Think of it as being on the other end of your home loan - You purchase a mortgage for $300,000 in exchange the buyer will make their mortgage payment to you for the next 30 years. Mortgages are safe; no one wants to lose their home.
What is the interest rate on your fixed mortgage? If you paid extra on your home, would you not be receiving a long-term gain of that percentage? When I pay extra on my mortgage, I am saving almost 4% compounded annually, guaranteed, no matter what. I believe paying extra on mortgages is the equivalent of having a bond in your portfolio of the same balance and rate of return, only with less risk. You control whether or not that payment is made, and I know we all like being able to control our money. The markets are experiencing volatility, no worries here. Now sell off the bonds in your portfolio that are lower than any loans you may have - stop being stupid and focus on long term growth.
Please share your thoughts, because just as dad said, 'All investments have risk hidden somewhere"