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What Are Investment Grade Bonds? – Forbes

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Stocks offer hard-to-beat returns in exchange for volatility, whereas investment grade bonds provide your portfolio with the balance you need to achieve your long-term investing goals.

What Are Investment Grade Bonds?

Investment grade bonds are corporate and government debt that bond rating agencies judge as very likely to be paid back, with interest.

Remember, a bond is just debt taken on by a company or a government agency to fund projects, much like you would borrow to buy a house or finance a car. While all debt—personal or corporate—is issued with the expectation that it will be fully repaid, unfortunately that isn’t always the case.

That’s why credit rating agencies—Fitch, Moody’s and Standard & Poor’s—evaluate bonds. The agencies assign investment grade bonds ratings of BBB- (Standard & Poor’s and Fitch) or Baa3 (Moody’s) or better. These ratings signify investment grade bonds are lower risk and are more likely to be repaid, making them good fits for more conservative portfolios seeking diversification or income.

At the other end of the rating spectrum are junk bonds: Risky debt that generally offers appealing yields along with a greater likelihood that the issuer could fail to repay your investment or meet their interest payment obligations.

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Advantages of Investment Grade Bonds

  • Less risky than stocks. Because bonds generally don’t experience the same volatility—or price fluctuations—as stocks, the value of your investment grade bonds is much more likely to remain constant on a day-to-day basis. In the unlikely event that a company goes bankrupt, bondholders are paid out before its stockholders, making it much more likely you’ll see a full return of the amount you invested.
  • Income generation. Income investors and retirees prefer investment-grade bonds because they produce a regular, reliable income stream. While certain stocks offer dividends, the payments aren’t guaranteed like bond interest payments are.
  • Higher yields than other fixed-income alternatives. Investment grade bonds tend to have higher yields than treasuries or municipal bonds. While interest rates for most investment grade bonds aren’t looking great right now, the longer-term average yield for investment grade corporate bonds is 2%, compared to municipal bonds’ 1.3%.

Disadvantages of Investment Grade Bonds

  • Lower returns than stocks. Historically, bond yields have been lower than the returns you can earn in stocks. It can be more difficult to meet your retirement or other investment goals if you invest too much of your portfolio in bonds. “You’re not likely to earn enough to keep up with inflation,“ says Maggie Gomez, a certified financial planner (CFP) with Money with Maggie.
  • Less liquidity. If you invest directly in bonds, versus holding shares of bond funds, you may not be able to offload your holdings in a pinch. Bonds typically need to be held until their maturity date, so your money will likely be inaccessible for several years. Or, if you are able to sell your bonds on the secondary market, you may have to sell at a loss.
  • Less transparency. Most corporate bonds are traded over-the-counter (OTC), meaning the market not only has less liquidity but also less transparency regarding prices. That increases the likelihood you end up paying more than you have to—and it’s also why financial advisors recommend most investors should stick to bond funds, rather than individual bonds.
  • Potentially high buy-ins required. Most bonds are issued in $1,000 increments and aren’t available as partial shares. This can result in large capital requirements for those looking to start investing in individual bonds.

How to Buy Investment Grade Bonds

Most people should stick to buying investment grade bonds via mutual funds, index funds and exchange-traded funds (ETFs). Navigating the bond market is challenging, and making good investments in individual investment grade bond issues requires expert-level knowledge.

The best bond funds offer a simple, inexpensive way to buy investment grade bonds. They are easy to purchase in a standard brokerage account or tax-advantaged retirement plan, typically with zero commissions and low expense ratio fees. Plus, bond funds provide instant diversification and are professionally managed, helping you avoid many of the pitfalls associated with individual bond investing.

If you’re dead set on buying individual investment grade bonds from a government or municipality, you should be able to purchase them directly from an issuer or the financial institution running the bond issue. It can be very difficult to buy corporate bonds directly from a public company, and you’ll most likely wind up purchasing them on the secondary market, where pricing can be much less transparent.

Read more: How To Buy Bonds

Should You Buy Investment Grade Bonds?

Investment grade bonds can provide reliable cash flows with relatively low levels of risk, making them a good fit for conservative investors, income investors and retirees looking to balance out their portfolios.

“It’s hard to recommend an ‘all stock’ portfolio to any client, regardless of risk tolerance,” says Frank Murillo, CFP, a managing director at Snowden Lane Partners. “In today’s market, investment-grade bonds help cushion the blows of stock market volatility and provide balance when equity markets go haywire.”

Investment grade bonds can also play an important role in your portfolio, especially as you get closer to the end date for your goal and want to lock in your gains. Before then, however, most advisors wouldn’t recommend you invest too much in bonds—you could miss out on stock market upside.

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Investment

Bitcoin tumbles 5.5% to $53,436

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Bitcoin plunged 5.5% to $53,435.9 at 22:04 GMT on Friday, losing $3,112.06 from its previous close.

Bitcoin, the world’s biggest and best-known cryptocurrency, is down 22.6% from the year’s high of $69,000 on Nov. 10.

Ether, the coin linked to the ethereum blockchain network, dropped 6.81% to $4,208.68 on Friday, losing $307.35 from its previous close.

 

(Reporting by Shivani Tanna in Bengaluru; Editing by Anil D’Silva)

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Investment

Toys prove to be better investment than gold, art, and financial securities – Phys.Org

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Credit: Pixabay/CC0 Public Domain

Unusual ways of investment, such as collecting toys, can generate high returns. For example, secondary market prices of retired LEGO sets grow by 11% annually, which is faster than gold, stocks, and bonds, HSE University economists say. Their paper was published in the Research in International Business and Finance journal.

According to a survey by Barclays, rich people invest about 10% of their wealth in jewelry, art, antiques, collectible wines, and cars (in addition to traditional investment in financial securities). Demand for such goods is particularly high (as is growth in their ) in developing countries, such as China, Russia, and Middle Eastern countries. These alternative investments are well-studied, unlike more unusual goods whose purchase might seem less serious: LEGO sets, Barbie dolls, superhero minifigures, or model cars and trains.

Victoria Dobrynskaya, one of the study’s authors and Associate Professor at the Faculty of Economic Sciences

‘We are used to thinking that people buy such items as jewelry, antiques or artworks as an investment. However, there are other options, such as collectible toys. Tens of thousands of deals are made on the secondary LEGO market. Even taking into account the small prices of most sets, this is a huge market that is not well-known by traditional investors.’

There may be several reasons for the rapid growth in the price of the sets. First, they are produced in limited quantities, particularly special collections dedicated to iconic films, books, or historic events. Second, after sets are retired, the number of them available on the secondary market is not large: many owners don’t see value in them (and lose or toss parts), while others, on the contrary, value them and don’t want to sell them. Third, LEGO sets have been produced for several decades and have a lot of adult fans. It would be reasonable to assume that the more time has passed since the set was manufactured, the more it would be valued as a classic sample or a nostalgic object. However, there had been no academic studies to substantiate this assumption.

The authors of the paper looked at the prices of 2,322 LEGO sets from 1987-2015. The dataset included information on primary sales and online auction transactions (only sales of new unopened sets were selected). Secondary market prices usually start to grow two or three years after a set is retired, but there is a significant variation in returns ranging from -50% to +600% annually. Prices of small and very big sets grow faster than prices of medium-sized ones, probably because small sets often contain unique parts or figures, while big ones are produced in small quantities and are more attractive to adults. Prices of thematic sets dedicated to famous buildings, popular movies, or seasonal holidays tend to experience the highest growth on the secondary market (the most expensive ones include Millennium Falcon, Cafe on the Corner, Taj Mahal, Death Star II, and Imperial Star Destroyer). Another attractive category includes sets that were issued in limited editions or distributed at promotional events: rarity increases their value from the collectors’ perspective.

Average returns on LEGO sets are 10-11% annually (and even higher if the new set was purchased on the primary market with a discount), which is more than stocks, bonds, gold, and many collectible items, such as stamps or wines, yield.

In addition, LEGO prices are weakly dependent on the stock market (they were growing even during the financial crisis of 2008) and are relatively low in comparison to art, antiques, and cars, which makes them a reliable and accessible method of investment. However, the authors of the study say that investment in LEGO is worthwhile only in the long term (i.e., over three years) and incurs higher transaction costs (e.g., delivery and storage) than investment in financial securities.

‘Investors in LEGO generate high returns from reselling unpacked sets, particularly rare ones, which were produced in limited editions or a long time ago. Sets produced 20-30 years ago make LEGO fans nostalgic, and prices for them go through the roof. But despite the high profitability of LEGO sets on the secondary market in general, not all sets are equally successful, and one must be a real LEGO fan to sort out the nuances and see the investment potential in a particular set,’ Victoria Dobrynskaya said.


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Investment in LEGO can yield returns of up to 600 percent


More information:
Victoria Dobrynskaya et al, Lego: The Toy Of Smart Investors, Research in International Business and Finance (2021). DOI: 10.1016/j.ribaf.2021.101539

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Toronto index turns negative as pot producers weigh

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Canada‘s main stock index erased early gains to trade lower on Friday, mirroring the mood on Wall Street, as losses in pot producers eclipsed firmer energy stocks and gains in Bank of Montreal after it reported upbeat earnings.

At 10:00 a.m. ET (15:00 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was down 70.91 points, or 0.34%, at 20,691.12.

Leading the declines, the healthcare sector dropped more than 2%. Losses were concentrated in pot producers Cronos Group Inc, Canopy Growth Corp, Tilray Inc, all of which fell nearly 5%.

The energy sector gained 1.0%, drawing support from a near 3% jump in oil prices after the producer group OPEC+ said it could review its production hike policy at short notice if oil demand collapsed due to new lockdowns. [O/R]

Bank of Montreal added 3% as its quarterly earnings topped market expectations and the lender joined rivals in raising its dividend and announcing a share buyback program.

The benchmark equity index was on track for its third straight weekly loss as sentiment this week took a hit from fears sparked by the new Omicron coronavirus variant.

“We don’t know what’s going to happen, if it (Omicron variant) worsens and if we start to see more restrictions coming and lockdowns, then that could obviously have a negative impact on the market,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.

On the economic front, the Canadian economy added a net 153,700 jobs in November, beating expectations, and the jobless rate slipped to 6.0% from 6.7% in October, Statistics Canada said.

HIGHLIGHTS

The TSX posted no new 52-week highs and five new lows.

Across all Canadian issues, there were three new 52-week highs and 31 new lows, with a total volume of 54.40 million shares.

 

(Reporting by Amal S in Bengaluru; Editing by Aditya Soni)

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