Hunkering down in bonds

The markets are really hopping around lately. Tech stocks have been bouncing up and down like ping-pong balls. Gold and silver are doing the same thing. Both sectors have had incredible runs. The Dow 30 stocks keep plowing higher as other sectors seem to grab hold then fall. Rinse and repeat. At times like these, I live and die by the mantra that losing money is to be avoided where possible. Of course, markets go up and down, so occasional losses are unavoidable. Mentioned many times here in Money Matters, Warren Buffett, iconic investor and founder of the holding Berkshire Hathaway, had two famous rules for investing: Rule one: Don't lose money. Rule two: Don't forget rule one. He had other rules, and one practice I always took to heart is he didn't invest in anything he didn't understand. Sound advice from the "Sage of Omaha," as he is often called. When the markets put the fear of God in me, as they do when they can't seem to find a direction, I like to put a good portion of my funds in bonds and the like. Bonds are just IOUs, which mean you give an entity some money and they pay you back later with interest. Bonds are available from private and public companies, municipalities, states and governments. Bonds can move up and down in price but for the most part, you buy a bond, pick how long you want to loan your money for (the term), and then collect the interest payments periodically or get all the interest at the end of the term in one lump sum. Bonds are generally regarded as more stable than stocks. The interest rate is usually fixed and if the issuer doesn't default, you get your money back and some. For portfolios, I usually just buy government IOUs, which go by different names like Treasuries, notes, bills and bonds. It's a bit confusing, all those different names, but just know they are all different versions of an IOU. Investors can buy individual bonds or bond funds. Bond funds hold lots of individual bonds and there is no "term" per se. The fund managers just keep trading the bonds in the fund and pay you periodic payments. The structure of bonds and bond funds are widely varied and for most mom-and-pop investors, it might be best to have a financial professional walk you through the ups and downs of it all, as there are many moving parts in the bond universe that can affect performance. For those holding money in a taxable account like an individual brokerage account or trust account, there are bonds and bond funds that may avoid taxes either partially or fully. Consult with a tax professional concerning applicable taxes on all investments and the accounts they are held in. Right now, the yield (what you get) is not super high, but they are not like the zero to one-half percent we saw a few years back when interest rates were in the basement. We can thank our rampant inflation for that. When inflation pops its head out and starts wreaking havoc on consumer pocketbooks, the Federal Reserve raises interest rates in an attempt to pound it back down into submission. These higher rates tend to translate over to higher yields in the bond market, making bond investors more money on the receiving end. While bonds may be touted to be a safer and less-volatile investment holding than stocks, bonds and bond funds can have their own land mines that can generate negative returns in investor portfolios. Unless one completely understands how they work and what the risks are, it's best to consult a financial professional before buying bonds willy-nilly. Either that or harken back to Warren Buffett's rule and don't buy anything you don't understand. This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a BA in Economics with honors, 1979, and California Insurance License #0L34249. His insurance agency is BAP INC. insurance services. Email: news@moneymanagementradio.com