Sorry Guys, Stocks Are Not Bonds

There have been many articles on Seeking Alpha that suggest investors should simply replace their bonds with stocks. Or that investors should simply ignore risk altogether and sell their bonds. There have been articles that suggest investors should not hold bonds at all. Once again, without any mention to risk or risk tolerance levels. Just who should hold zero bonds? As you can imagine I spend considerable time imitating a bobble-head doll with my head repeatedly shaking side to side in the typical "NO" gesture. Stocks are not bonds.

Investors largely hold bonds for two reasons; for income and for portfolio risk management, and generally for their lower risk characteristics. Bonds are number one on the food chain when a company runs into trouble, or goes bankrupt. If a company goes out of business, bond holders are paid first. They are first in line. Shareholders are standing on their tippy toes trying to get a glimpse of those bondholders at the front of the line. If there's real trouble with the company, those shareholders might as well just go home, cause there won't be anything left after the bond holders take their cut; sometimes that's a full cut. It's the same story if a company is struggling but not declaring bankruptcy. The bond holders may continue to get their income in full. The dividends can be suspended, reduced or cut.

Source: Seeking Alpha

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