What you need to know about bonds
December 16, 2013
The financial community (which includes me) makes most of its money off mom and pop investors, and the more we convince these investors they need us, the more money the financial community will make.
I am not one for feeding off people's ignorance but instead try and educate the masses so more people can manage their own monies and subsequently avoid the costly fees and commissions that advisors and firms charge.
For example, I want to educate those reading this article as to what a bond is.
Although a bond is the simplest of concepts to grasp, my community of financial advisors have done a very poor job at educating investors, and you will now read a great example of why I say this when you learn about bonds in the next two minutes as you read this article.
Bonds are nothing more then IOUs. You give someone money and they give you an IOU. The financial community calls IOUs by different names, which can confuse a person, but just know that a bond is just an IOU like any other IOU. The terms can be whatever the purchaser and the borrower agree on them to be, from due dates to interest rates and all conditions in between. The agreement is just that — a person gives someone money and then the two parties agree on how they will compensate for that money.
Private bonds can be called notes; money lent on a house is called a mortgage; when a city borrows your money it's called a municipal bond; and when the Federal government borrows your money they can be called bonds, treasuries notes or bills.
No matter what we call this borrowing and lending, its all just debt. Bonds therefore are debt, and bond funds are just baskets of debt.
As you can see from this example, bonds are simple things to understand if you understand loaning out money. Since we've all done that at some point in our lives, you now understand what a bond is.
The fact that you may not have known what a bond was until reading this article goes to show just how poor a job the financial community has done at really helping you understand just what it is you are buying.
I happen to believe it's by design, for the less you understand, the more money you throw at us. The truth is, many of you would probably be a lot better off (and a lot richer) without us. All you have to do is to take a little time to learn how to do it yourself. And you just did.
As for my fellow financial analysts and advisors, perhaps we should consider spending more time educating the client as to exactly what it is they are buying. They will then be able to make a more informed decision about their investing, which will enhance the customer/broker relationship and install an additional level of trust in our services.
This article expresses the opinions of Marc Cuniberti. He hosts "Money Matters" on KVMR FM 89.5 and 105.1 FM on Thursdays at noon. His website is http://www.moneymanagementradio.com. Money classes are ongoing; just send an email at firstname.lastname@example.org for more information.
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