You never forget your first experience with investments, do you? I’m talking about the kind that involves finances, not anything else you might have in mind.
Back in 1990, I made my debut in the stock market with Harley-Davidson (NYSE: HOG). I bought 50 shares at $12 each, and three months down the road, I sold them for $18. After accounting for the $49 trading commission, I walked away with a neat $202 profit.
Fast forward a few years, my wife was working with a well-known consumer goods giant. The company was on a steady course, but there were some upcoming initiatives that caught my interest. Since the company was privately held, buying shares wasn’t an option. That’s when I stumbled upon the world of bonds. I wasn’t well-versed in bonds back then, but the idea of investing in this company was enticing.
As I delved deeper into the company’s financials, I had an epiphany: “I can buy this bond for $820 and in three years, it’ll mature for $1,000, with a 7.25% annual return? Count me in.”
The core difference between stocks and bonds intrigued me. Owning stock represents a slice of the company, binding your success to theirs. Bonds, on the other hand, turn you into a creditor. It’s a loan, one that companies are obligated to repay, unless they go belly up.
I decided to buy those bonds. Sure enough, when they matured, I received my $1,000. Here’s the kicker – those initiatives I was excited about didn’t pan out as expected. If I had been holding the company’s stock, my investment value might have stagnated or dropped. But with bonds, short-term performance fluctuations or Wall Street’s whims don’t matter as long as the company stays solvent. Contracts ensure the repayments, and luckily, the company easily covered its loans despite not hitting a home run on profits. It was a win for me with a solid yield on top.
While I’m still an admirer of stocks—enjoying the dividends and watching them grow—my priorities have shifted. As time goes by, I find myself focusing more on income and protecting the capital I’ve built.
Bonds are my allies in this mission. I get a steady income stream and the comfort of knowing my bonds will mature to $1,000, regardless of what I initially paid. By purchasing bonds from reputable companies that offer a competitive yield and are available at a discount, say around $900 or even $800, I can be confident of a $1,000 payout at maturity.
A lot of people undervalue the potential of bonds, especially the speculative ones. Consider a bond with a 4% coupon rate from a troubled company that’s trading for just $500 instead of $1,000. This is termed a distressed bond, and the market seems skeptical of the company’s future. However, if you believe the company will honor its obligations, buying the bond at $500 could be a winning move: an 8% yield annually with the possibility of doubling your money when it matures at $1,000.
Keep in mind, pursuing such high-risk bonds isn’t for the faint-hearted. Most investors incline towards safer options, snatch bonds priced in the $900 range, secure a strong yield, and pocket a return upon maturity.
Incorporating bonds into your portfolio is a strategic way to secure income flows, cushion against market turbulence, and rake in profits. When I picked my first stock investment, luck played its part. With bonds, it’s not about luck; they’re engineered to deliver results. That’s precisely their beauty.
