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74 Don’t Make Me Say I Told You So

Credit Ratings
This table shows credit-rating classifications by
Moody's and Standard & Poor's from highest to lowest.

Investment Grade Speculative Grade
Moody’s S&P Moody’s S&P
Aaa AAA Ba BB
B
AA
Aa
B
Insert these paragraphs as new paragraphs after the word suffer:
A A Caa CCC

Baa BBB Ca CC
While bonds perform poorly during a period of rising interest rates,
C
C
D
inflation has the most damaging effect on bond returns over time.
The chart below shows that bonds have had a nominal return of
5.1% per year since 1926, but the actual return after inflation was
Call Risk – Some bonds can be “called” by the company that
just 2.0% per year. From 1926 - 2019, $1 in bonds would have
issued them. This means that the issuer can arbitrarily require
grown to around $100. After inflation is accounted for, however, the
the bond holder to surrender that bond at a specified price.
purchasing power of that amount is only around $7.
This usually happens when interest rates decrease, allowing
the issuer to issue new bonds at a lower interest rate. This may
During periods of high inflation, investors in bonds can actually lose
money on an inflation-adjusted basis. From 1970 - 1980, inflation
force you to reinvest the principal sooner than expected, usually
average 7.8% per year. While it appeared that bond investors over
at a lower interest rate.
that time had earned a total return of 103%, they had actually lost
Inflation Risk – The interest rate on a bond is set when it is
11% when the return was adjusted for inflation.
issued, as is the principal that will be returned at maturity. If
there is significant inflation over the time you hold the bond,

the real value of your investment (what you can purchase with
the income) will suffer.

Liquidity Risk – There is the risk that investors may have

difficulty finding a buyer when they want to sell their bond. If

INSERT CHART #122 - INFLATION BIGGEST THREAT TO BONDS
- IT'S IN OUR SHARED FOLDER IN DROPBOX
Chapter 3: You Must Have Growth In Your Portfolio