Expert: Doug Ingram - 11/10/2001

Question
Hi Doug,
I intend to invest in a global bond fund, should be open-ended ones. My time frame is about 3 - 5 years. Are bonds safer than stocks generally? I already have some money in mutual funds but they are not doing well currently, so I would like to have some diversification and hence I'm considering bond funds.
Thank you.
Wesley

Answer
Generally bonds are much safer than equities as they represent an actual promise to return your investment plus a coupon for a given time (and potentially more in the case of a discount bond).  Bond debt is the most senior debt and is higher priority than stock.

Bonds are only safe insofar as the issuer can pay the interest and the principal.  People trust the U.S., U.S. agencies, the best corporations, and well maintained cities/counties/states (municipals).  

Thus, companies or municipalities that are financially troubled are no safer than equities and become high-yield or "junk" bonds.  Likewise, the debt of foreign countries is only as good as their ability to service that debt.  For instance, two weeks ago Argentina indicated that it would default on its debt.

So a global bond fund is NOT as safe as a U.S. bond fund.  I would check the ratings on morningstar.com before entertaining global bond or stock funds.  

The enemy of the bond market is inflation.  If you think inflation is in check, you could even consider CDs in banks.  That way you're insured up to 100,000 in each bank.

In the long haul, stocks should outperform bonds.   But, for the last few years, bonds are WAY ahead.