Risk is a part of investing in the stock market.
Risk comes in many forms, but not all are easily identified.
In a perfect world, investors would know how much (and what type) of risk an investment carried.
In a perfect world, investors would receive a premium return for taking risks – the more risk, the higher the premium.
Alas, in the real world, I don’t really look like Harrison Ford, and investors seldom know the true risks and often don’t receive a premium yield if the investment is successful.
When investors are nervous about the stock market, it is not uncommon for them to pull money out of stocks and place it somewhere the perceived risk is not as high.
This is known as a “flight to safety.” When many investors do it at the same time, stock prices suffer from all the selling.
Bonds and particularly Treasury bonds are often when investors park their money when the stock market looks too scary.
However, are Treasury bonds that safe?
There is virtually no chance the U.S. will default on its bonds (if that should happen, head for the hills, because civilization as we know it will end).
The problem is when investors flee the stock market for bonds; they seldom hold the bonds until maturity.
Instead, when the stock market looks less scary, investors will sell their bonds (before maturity).
Selling bonds on the open market can be as risky as buying or selling stocks.
The price you receive on the open market is determined by things such as interest rates, supply and demand, and finding a buyer.
This can translate into a losing trade for the investor.
If interest rates rise, your bond will likely not sell at face value.
Moving money from stocks to bonds may avoid stock market risk, but it doesn’t protect you from the risks that you might not be able to sell the bond at face value before maturity.
