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Bonds and Investing

1 January 2007 - Features - Editor

The stock market was nowhere as popular in the early post World War II years, as it is today. Many of today’s top companies were just starting out in business, recovering from the war and depression before it, or did not exist at all. People had generally conservative mind sets, and a bank or a post office was the best place to park money.

Bonds became fashionable when governments thought of raising money from citizens with surplus funds, for public development. It was convenient for politicians to dream of fancy projects with gestation periods beyond their own terms in office. The concept of deficit financing meant that a government could redeem its pledges on bonds by simply expanding the money supply. People bought in to this because the returns were better than with savings accounts, because everyone wanted to build a nest for the future, and because no one can think of a government becoming bankrupt.

Companies latched on to the bond band wagon in time. The route provided funds without the nosy enquiries of banks. Investors saw it as a back-door entry to the best companies whose shares had unattractive price to earning ratios. Prudent management teams used bond finance for highly productive applications which also had few risks. It worked well for all players.

The stock market scenario of today is entirely different. Many local governments in third world countries are guilty of profligacy, and have lost their net worth in real terms. Corruption siphons off large chunks of true values. The wars in Iraq and Afghanistan and the health insurance bill, place the future economic state of the United States in great jeopardy. The break down of the Bretton Woods agreement allows countries such as China to use exchange rates as a means of competition. Their dollar holdings and roles in economies of the West are highly influential. Governance has emerged as a thorny issue in the corporate world. Finally, the stock market has developed tremendously and offers flexibility, returns, and choice, all of which puts bonds in the shade.

Today’s stock market investor can divert some part of a portfolio to bonds for sentimental reasons, or as a bulwark against a sudden and steep fall in stock market indices. It is also a good parking slot for people who have little time and inclination to study stock market movements, and who prefer the serene comfort of a bond. However, the significance and utility of bonds from a modern stock market perspective, is on the decline.

 


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