The Pitfalls of Long Term Bonds

Investing in long term bonds is one of the most common forms of investment over the last 100 years. Long term bonds can be purchased from the United States Treasury in the form of savings bonds and from corporations as well. As an investment, bonds provide you with a steady rate of return and a lower amount of risk. With this type of investment, you can basically tell exactly what to expect over the long term. While it can be a beneficial form of investment, there are some pitfalls associated with this type of investment. Here are a few potential drawbacks that you may experience while dealing in the long term bond market. 

Company Related

When you buy a long term bond from a corporation, the success of your investment depends greatly on the strength of the company itself. Long term bonds can go for 20 or 30 years with regularity. This means that you are basically betting that a company is going to last that long in order to keep making interest payments to you. When you consider that most businesses fail long before this amount of time, the long term bond market suddenly becomes less appealing. 

Proponents of long term bond investing will tell you that as a bond owner, you are towards the front of the line to collect if the company files for bankruptcy. While this is true, it does not really tell you the whole story. Yes you will have a better chance than others of getting your initial investment back. However, depending on how bad the company is in debt, there is a chance that you will not get your investment back. Other creditors may be first in line and require payment first. Even if you do get your initial investment back, you have only gained back your original investment. Instead of the regular interest payments that you were counting on for the next 30 years, you just get your money back. This can be a major problem with long term bonds if you select the wrong company to invest in. 

Low Returns

Another drawback to investing in the long term bond market is that you traditionally receive a low rate of return on your investment. While they do usually represent some stability and give you the ability to plan on what you will make, the rate is often quite low when compared to other investments. You are therefore losing the opportunity to gain more money from other types of investments. For some, the opportunity cost of investing in long term bonds is greater than the benefits that they receive from doing so. Each person has to evaluate whether they are willing to tolerate some level of risk to get a higher return or if they like the relative safety that a bond instrument provides. It is a personal decision, but you should not expect huge returns in the long term bond market. 

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