Fixed Income Securities

We haven’t talked about stock yet, but when we do we’ll see that common stock is nothing but a share of any profits that a company might—or might not—generate at this point. Common stock doesn’t promise any particular rate of return. Many times the return is negative 100%. Unfortunately, many investors don’t find this out for many years, meaning that the money that could have been earning some interest in our “safe money” category didn’t and, worse, is all gone now. As Jerry Seinfeld has said, sometimes when you try to put your money to work for you, it ends up getting fired. Why would anyone buy common stock then? Because you can make an unknown and unlimited return on your investment. It is not unheard of for people to see the value of a stock investment go up by a factor of 10 or more. Put $20,000 into Company ABC, and in a few years, you’re sitting on a position worth $200,000. It happens. And, so does that negative 100% thing.
Bonds, on the other hand, pay a fixed stream of income to the investor. That’s why the industry calls them “fixed-income securities.” If you want to smooth out the returns in your retirement account, putting your money into “fixed-income” is a good way to do it. While stock prices rise and fall on wild mood swings of greed and panic, a bond that pays, say, 8% interest, is going to keep on paying the same old 8% interest year after year until the thing matures. Yes, rising interest rates will cause the market price to drop, but if you’re not going to sell, and you don’t mind seeing your account statements take a temporary hit, you actually might not care so much.