Two Reasons Why It's Important for Investors to Understand Bonds

By Rick Kahler via

What would you guess is the hardest investment class for most people to understand?

You might think it’s stocks, or a subclass of stocks like those of companies in emerging markets. Or how about real estate investment trusts (REITs) that hold various types of investment real estate. Maybe it’s commodities or complex alternative investments like managed futures or long/short funds.

While all of these have varying levels of complexity, I find the most difficult asset class to explain is bonds.

Even the name “bond” is confusing. It’s not intuitively descriptive like real estate, commodities, or even stocks. Here is the big difference between bonds and all these other investments: With stocks, real estate, and commodities you own something. You own a tiny slice of a company, a piece of real estate, or a commodity like gold, oil, or grains. You don’t buy these things primarily to receive income. While companies can pay small dividends and real estate can throw off rent, the real reason for owning financial investments is appreciation, the hope they will increase in value over time and can be sold at a profit.

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