Why stable investments like bonds might take a dip now and then

Updated by Marco Barmettler

The bonds as part of your Selma portfolio are there to keep your investments stable & diversified. Right? But what if you see red numbers when you look at those investments? 

Let’s start here: What is a bond? 

A bond is an investment product where e.g. companies or governments lend money from investors – with the promise to pay it back including the interest rate. 

Why can bonds lose value then?

When interest rates rise – bond prices typically fall. ⚖️

Unlike with stocks where you actually buy something, with bonds you lend your money and get an interest rate on that loan. When interest rates rise, the bonds you own are stuck with their lower interest rate and aren’t as attractive for investors anymore. 

That’s why they lose value. New bonds come with a higher rate and provide investors more income! 

So, as many bonds have fixed interest rates and can’t just move with the market, investors want to switch out of such bonds and invest the money in bonds with higher interest rates attached.

That’s why the market value of bonds can get lower and you might end up with bonds that show negative numbers in your portfolio.

Bonds tend to balance out as you get the promise that the full amount is paid back, but in the meantime they can move up and down based on the interest rates.

Bonds at Selma

A mix of bonds (like you invest in with Selma) balances out the interest rate risk as it comes with different kinds of loans and often different agreed terms (short-, medium-, long-term) based on how soon they promise to repay investors.

Also, Selma invests only in bonds of companies and countries that are rated as "high quality". So, once the payback time for the bond is approaching the value of the bond tends to go back to their full value.

Therefore it’s important to invest long-term and never panic when seeing red while looking at your bonds.

How did we do?

Powered by HelpDocs (opens in a new tab)