How should investors think about protecting their gains after the recent market rebound, and when should playing defense become a bigger consideration? EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Research Analyst Kate Austin discussed defensive allocations to bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. and markets’ potential to decline again in our recent quarterly webinar*—Take Your Pick: Recession or Recovery?
Please enjoy the excerpt below and click here for the full webinar replay to hear more.
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Kate Austin: DividendA cash payment to investors who own stock in the company. mutual funds and stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. can be a great investment and option. We like dividendA cash payment to investors who own stock in the company. stocks and mutual funds that not only pay a dividend, but also raise it every year, as these stocks or the companies that make up these funds tend to be more financially sound. Historically, dividend-paying stocks have tended to also outperform the market when times are good and recover faster after a downturn, which I think is something that everyone can agree is really good in any portfolio.
So we like those and obviously we think that they will bode well for the future. Now flipping to the fixed-income side, both Treasurys and Treasury funds tend to have a lower yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. relative to their corporate counterparts, but they’re also backed by the full faith and credit of the U.S. government.
So if you think about it, they’re about as close to risk-free as you can get [when it comes to defaults]. But because they are less risky, you should expect a lower yield. Now investment-grade corporate bonds are a little bit riskier as they’re issued by companies and not the government. And while it doesn’t happen too often, these companies can default on their debt or not pay back all the money that they owe to the bondholders. So because they’re a little bit riskier, you can expect a little bit higher of a yield.
If you’re looking at Treasurys versus corporate bonds, it’s really a little bit of a risk-reward tradeoff that you need to be comfortable with going forward. But also who’s to say that you can’t have a bit of both?
For more on the risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. and benefits of bonds, check out our blog post: Bonds 101.
*Webinar recorded after the market closed on Wednesday, July 22, 2020.
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