Hello and welcome to another of my finance related web sites, and this one has been designed to help you understand all about savings bonds, so that you can find the best savings bonds on the market, whether you live in the UK, the US or Canada. If this is the first time you have visited one of my sites may I wish you a very warm welcome and I hope you find the information and advice here both useful and informative. As a self taught full time trader and investor, who has been involved in trading and investing for over fifteen years, I know how hard it can be to find good quality, impartial and reliable advice, particularly as a woman.
Sadly much of the financial world is filled with meaningless jargon which is hard to understand, even for someone like me, who has been involved in the financial industry for many years. Whether this is deliberate or simply an accident, I'm never quite sure - suffice to say the savings and investment industry is particularly bad at this, and shrouds itself in mystery, using arcane language which can make it extremely difficult for you as an investor to understand where you money is being invested. My first rule of investing is simply this - if you don't understand where your money is going, don't sign on the dotted line. In a recent survey in the UK on an investment product called a Stocks & Shares ISA ( Independent Savings Account), a survey by the FSA ( Financial Services Authority) found that 40% of investors had no idea that the value of the investment rose and fell in line with the performance of the stock market - sad but true!
All the information you need is generally freely available, so there should be no excuse not to understand the nature of the investment, or the potential risks and rewards associated with the product. As you will see in the above navigation bar, I have two blogs on trading, investing and currency trading, and if you would like to ask me any questions, please just email me via the link above. I do receive several hundred emails a week, so please be patient, I will always try to answer your question as quickly as possible.
Over the next few pages I will explain for you in detail the various savings bond products available in the UK, US and in Canada, including how to calculate rates of return, what bonds are, and the risks involved. By the time you have read the next few pages you will be an expert on saving bonds, and will have no need to talk to a financial advisor or any other so called "expert"- in fact they will probably need to talk to you! So let's get started and take a look at what a bond is in simple terms.
If you have ever borrowed money from someone, perhaps a colleague at work, and said to them 'I'll pay you back tomorrow', then in effect you have issued a bond. Perhaps you have left your wallet or bag at home - perhaps you have a temporary cash flow problem, whatever the reason your colleague has provided you with a short term cash loan, so that you can continue to work in order to repay them in the near future. Now in this simple example, nothing has been written down ( you have a verbal contract in this case ) but your colleague will expect to be repaid tomorrow in full. In effect you have issued an IOU or a "bond". What is very unlikely is that your colleague will charge you for this loan. In the real world two things differ from the above simple example. Firstly the bond is a written contract, and secondly you are rewarded for the privilege of lending your money. This is the basis of all bond markets including the savings bonds market.
Just as people need money on a short or long term basis, so do companies and governments. A government needs money for everything from social programmes to major infrastructure or building projects such as sporting events like the Olympics. Companies need money for the same reasons, to fund expansion, growth overseas, or new building projects. The problem for large companies is that they generally need far greater sums than they could borrow from the average bank or raise from private sources. In order to overcome this problem the company or the government issues a bond, which in simple terms is a loan contract where you are the lender. The organisation that issues the bond is known as the issuer.
Now whilst you might lend a small amount of money to a friend for nothing, you would not lend a large sum to a company or government just because you felt generous towards them - you expect something in return. That return comes in the form of interest and is one of the principle factors in arriving at a saving bonds value.
Now one distinction with bonds is that as a holder of a bond you are a creditor of the company or government or put another way, a debt holder. This is very different to owning stocks or shares where you are an equity holder. As a shareholder, you have voting rights, and the opportunity to receive dividends and share in the future prosperity ( or otherwise ) of the company. As a bond holder, you do not have any voting rights, nor are you entitled to any dividends. You do however have a higher claim on any assets than the shareholders, should the company or organisation go into receivership. As a shareholder you are exposed to much greater risk and in theory could lose all your capital. With bonds the risk is much smaller, and therefore the returns are smaller. All investment decisions eventually come down to this one simple principle - the higher the risk then the higher the reward, and the lower the risk then the lower the reward. In general saving bonds are considered low risk investments and as such you will receive a lower return. Now you might wonder why many people invest in saving bonds - there are three main reasons :
1. Firstly, because as individuals they feel uncomfortable with higher risk investments
2. Secondly the savings bond provides a low risk balance to a broader portfolio with higher risk investments
3. And finally they are a tax efficient way to save - whichever country you live in!
As an investor it is vital that you understand both your view of risk as an individual, and also the long term goals that you are trying to achieve, in both your personal and professional life. Saving bonds will normally be part of a long term investment strategy, and will never produce quick returns or spectacular gains, but they can provide the basis for a balanced portfolio, or alternatively as free standing investments for long term security. Almost all investors buy bonds because they are considered to be risk free - as a general principle this is true and it is certainly the case for government issued bonds. Company bonds however still carry some degree of risk, which we will look at as we explore each type of savings bond. Now my purpose with this site it to introduce you to some of the lower risk saving bonds currently available. As you will appreciate there are many higher risk bonds available once you have a good understanding of the basics, and which you choose will ultimately depend on your appetite for risk and your investing goals and objectives. Suffice to say the bonds I propose to cover here will be those typically backed by the government, government agencies or the central banks. They may be low risk, but you can still produce a good solid return when compared against other more risky investments, and in my view they should always be part of your investing strategy as a tax saving bond.
OK, now before we begin looking at bonds in details for each of the various countries, I would like to start by addressing the following question - " why buy savings bonds at all" - not an unreasonable question and one I am often asked. So let me try to answer this for you, and I hope put savings bonds into perspective within your overall investment strategy.