Daniel Sachs is the CEO of Proventus AB, a Sweden-based company that funds mid-sized companies looking for capital to grow or restructure. They do this primarily by investing in public corporate bonds, leveraged loans and private corporate loans. Proving that bond investing does not involve a life of numbers and legal jargon, Daniel is also a Chairman and/or Member of a number of design, theater, and arts organizations. And as if that weren’t enough, Daniel was nominated to be a Young Global Leader by the World Economic Forum in 2007, and he’s a member of the European Council on Foreign Relations. He holds an MBA from the Stockholm School of Economics and The Wharton School at the University of Pennsylvania (so listen up, kids).
If someone asked you whether you included bonds in your investment portfolio, you might wonder, ”What is a bond and why should I care?”
Well, a bond is an obligation by a company, a state, or a municipality (like a city or township) to repay the bond holder a certain amount – plus a fixed amount of interest. Each bond is repaid on a specific date (called “maturity”), though some bonds pay their interest yearly, quarterly, or sometimes monthly. This paid-out interest is often called a coupon. Other bonds are called “zero-coupon bonds,” which pay all of their accrued interest at maturity. Bonds can have short maturities (1-2 years) or much longer maturities (5-10 years). And some bonds may even be converted to stock shares once they mature. Bonds are issued directly by companies (corporate bonds), municipalities (municipal bonds), and states (government bonds).
Investing in a corporate bond is like a bet on a company or state’s ability to repay the bond amount and interest on maturity. But investing in bonds is lower risk than investing in stocks. Shares of stock can decrease in market value by 10, 50 or even 99%, but if a bond is purchased at its original value (“nominal value” or “par value”) and held to maturity, the investment can only result in a loss if the company (or state) goes bankrupt or renegotiates its liabilities.
One of the advantages of investing in bonds is that you will typically know what return to expect, which is never the case with shares of stock. A bond with a yield of 5% which is bought when it was originally issued and held to maturity will give you a return of exactly 5% (assuming nothing dramatic happens to the bond issuer). Different bonds yield different rates of return depending on the risk involved. For example, a company which is perceived by the market as high-risk can yield a return of 15% (in exchange for the increased risk of bankruptcy and therefore you losing your investment). And government bonds and bonds of very solid, low-risk companies will yield just a few percent in today’s markets.
If you compare stocks and bonds in terms of earning potential, stocks will typically give you a better return – if things go well. But if things don’t go so well, it will result in a bigger loss for you. By combining stocks and bonds, you can build a portfolio that has less risk than an all-stock portfolio, but that may give you a higher overall return than an all-bond portfolio. The disadvantage of investing in bonds is that they are legally much more complex than stock and the legal terms may differ between different bonds. But that’s what your broker or banker is for. They should be able to advise you on how to go about investing in bonds without any trouble.
Good Luck!
- Daniel