Intro: In this episode we discuss why we hate bonds so much. We teased this in an episode prior and I’m excited to take a deep dive and talk about our rationale behind the show title.

Headline of the week:

https://www.cnet.com/personal-finance/reddit-and-elon-musk-sent-gamestop-stock-soaring-why-amc-and-blackberry-are-next/

Reddit and Elon Musk sent GameStop stock soaring. Why AMC and BlackBerry are next * Recording this on Wednesday, 1/27 * AMC up 301%, Gamestop up 134%, blackberry up 32% * What’s happening?

+ Reddit users are piling into Gamestop and other companies because they noticed there is a heavy short interest in the stock by institutional investors. Obviously there are only a certain number of shares outstanding in these companies, so the reddit users themselves are artificially inflating the stock price… but...
+ Shorting a stock essentially just means you’re betting the price will go down.
+ If the price of the stock goes up too quickly and you’re shorting it, the people betting against the stock are forced to buy stock at the higher prices to essentially cover their losses.
+ It’s sending these near bankrupt companies to the moon

• Long story short - some of you may be thinking - should I be buying Game Stop, or Blackberry, or AMC?

  • It’s like playing with FIRE… don’t do it. Eventually - as with all of these get rich quick ideas… people get hurt. We don’t want that to be you.

Main Topic

Bonds

What is a bond? A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments.

Bonds are issued by governments and corporations when they want to raise money. By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.

Unlike stocks, bonds issued by companies give you no ownership rights.

So you don't necessarily benefit from the company's growth, but you won't see as much impact when the company isn't doing as well, either—as long as it still has the resources to stay current on its loans.

Risks of bonds:

• Although bonds are considered safe, there are pitfalls like interest rate risk—one of the primary risks associated with the bond market.
• Reinvestment risk means a bond or future cash flows will need to be reinvested in a security with a lower yield.
• Callable bonds have provisions that allow the bond issuer to purchase the bond back and retire the issue when interest rates fall.
• Default risk occurs when the issuer can't pay the interest or principal in a timely manner or at all.
• Inflation risk occurs when the rate of price increases in the economy deteriorates the returns associated with the bond.

Biggest risk of all?

OPPORTUNITY COST!

You could be selling yourself short of reaching your retirement goals by investing in bonds.