Why not avoid bonds too?

Last time, I talked about my (thankfully?) fruitless attempt to buy tax liens as an alternative investment vehicle. I was initially attracted by the promise of high returns, but ultimately left feeling like what I was trying to do was—if not exactly unethical—certainly not very seemly. I didn’t want to profit on people’s misfortune.

But when I expand the scope of this inquiry a little further, it bumps up against services with similar outcomes, such as with peer-to-peer lending services like Lending Club and Prosper. Same thing: high return potential, but due to another user’s borrowing.

We don’t like to borrow around here for ourselves (as getting rid of debt is a prerequisite for becoming wealthy). We don’t encourage our neighbor to borrow money. All of which leads to a bit of an unfortunate reality that one of the major investment products available to us is a kind of debt.

I’m referring, of course, to bonds.

Word is bond

“Stocks and bonds” are the “meat and potatoes” of the investing world. But while most people know that a share of stock means that you own a piece of a company, bonds seem to get less thought.

A bond is, to quote Investopedia:

A bond is a fixed income instrument that represents a loan made by an investor to a borrower […] A bond has an end date when the principal of the loan is due to be paid to the bond owner and usually includes the terms for variable or fixed interest payments that will be made by the borrower. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.

So bonds are debt. A company (or government) will issue bonds to raise revenue in order to do things.

This is normal. And by this I mean, most companies will do this. According to Retire By Dad, a blog that tracks these things, there are currently less then 20 companies listed on the S&P 500 that do not have debt.

Is this a good thing or not?

The question doesn’t have a simple answer, but it’s worth at least asking. If we don’t suggest a person borrow money to fund projects (as in, buy cars on payment plans, use credit cards for everyday spending, etc.) wouldn’t we want the same of our companies?

And if we decide we don’t want companies to leverage themselves (“leverage”, you may recall, is a fancy word for debt) because we don’t think it’s in their best interest, then would we want to lend them money?

Because that’s what you’re doing when you buy a bond.

At its heart, this is another facet of the question on whether it’s possible to be an ethical investor. If I’m going to give money to someone or something, I want it to be in line with my ethics.

Would I really want to give money to companies that traffic in firearms or tobacco? No. What about companies that support limiting individual freedoms, such as reproductive freedom and the ability to express your partner preference or gender without discrimination? Not a chance.

And would I want companies to act in a responsible and resilient financial manner? Of course.

The problem is two-fold:

• Companies aren’t “good” and “bad”. Any company with a given size is likely to have at least some initiative that you would disagree with.
• Selectively picking certain companies over other is a form of “timing the market”, or more like “sectioning the market”, and therefore leaves you open to sub-par returns.

That last point is kind of cynical, but it’s also pragmatic. We’re not just investing in companies because we like or dislike them. We need the earning potential they offer. There are few paths to wealth without this.

And bonds offer a lower-risk, lower-return, performance reasonably decoupled from stocks. When you’re at the stage in life where you don’t have the time to withstand a huge market correction (say, less than 15 years from retirement and beyond), then where else would you increasingly park your money? Bonds are a proven method, at least historically-speaking, for reducing volatility.

What we talk about when we talk about investing

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]But we need to do what is most likely to offer us financial security. And bonds are likely part of that picture, in some form or another.[/perfectpullquote]

I think the important awareness here is: these investment products that we buy and hold and sell in order to fund our retirements and our future well-being, these aren’t just numbers and positions and charts and graphs. We are helping to own (or fund) public companies that are building our world.

Once our personal financial stability and freedom is assured, we can choose to give and invest in whatever we want.

But until we get to that point, I don’t believe that we have that luxury. Since we’re not picking individual companies, we are somewhat insulated from these choices anyway. But we need to do what is most likely to offer us financial security. And bonds are likely part of that picture, in some form or another.

But enough about me. What do you think about bonds? Have you thought about them?