What are the risks of government bonds?

Investing in government bonds carries specific risks, especially noted during periods of market volatility. Here are the key risks outlined by Brad Barrett and his guests:

1. Interest Rate Risk: When interest rates rise, the value of existing bonds with lower interest rates decreases, which can result in capital losses if the bonds are sold before maturity 1.

2. Inflation Risk: Bonds may not keep up with inflation, which erodes the real return on the investment. This is particularly significant in higher inflation environments 2.

3. Correlation with the Stock Market: Certain bonds, especially corporate bonds, have shown positive correlation with the stock market, reducing their effectiveness as a diversification tool 3.

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     1

     Bond Market Dynamics

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     2

     Rethinking Investment Risk

     00:34:54
     
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     3

     Bond Market Insights

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     4

     Stocks vs. Bonds

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4. Limited Diversification: Total bond funds may not cover the entire bond universe and often don't provide the diversification expected from bonds, potentially exposing investors to unexpected market risks 3.

5. Liquidity Risk: During economic downturns, liquidity in the bond market can decrease, making it hard to sell bonds without taking a significant price cut 4.

To manage these risks, a diversified investment strategy that includes not only different types of bonds but also other asset classes is advised. This approach increases the likelihood of achieving investment success even when certain asset categories underperform.