Investors trust their money manager to successfully administer their financial portfolio. Investment options such as CDs, mutual funds, stocks and variable annuities exist; however, bonds often prove to be the safest choice for investors. An investment management education gives finance professionals the opportunity to expand their skillset and gain a professional perspective. Clients will develop a trusted relationship with their financial advisor when they recognize the effort that he or she has invested in an education. This education will allow the money manager to make wiser financial decisions for all of his or her clients.

Bonds are debt instruments, comparable to an IOU, that are issued by a corporation, municipality or government. Historically, long-term bonds have exhibited roughly half the risk level of common stocks. However, risk between these two broad investment categories can vary depending upon the period cited and the type of stock or bond as well as the bond’s maturity duration. In 2010, for example, long-term U.S. Government bonds with 20-year maturity had a standard deviation of 13%, while large cap U.S. stocks (S&P 500) had a 22% standard deviation. Medium-term U.S. Government bonds with 5-year maturity had a standard deviation of only 4%. This implies that long-term government bonds involved 41% less risk than large stocks while 5-year government bonds involved 82% less risk.

A money manager is normally attracted to bond funds for their client’s safety or to use as a diversification tool. The price of a bond often changes throughout the trading day. Most of the time, a government bond’s price movements over a day, a week or a month are much smaller than the variation of a stock category or index. The face value of a bond is only promised or guaranteed if the bond is held until maturity. In comparison to bonds, common stocks represent a fractional ownership of a company. Historically, stocks have outperformed bonds. However, stocks typically exhibit about twice the risk level of long-term bonds, returns are far less predictable, stock losses of 10-50% or more are not uncommon and a stock investor can hold stocks for a decade and still experience a loss.

Since profitability is not guaranteed in any investment decision, risk is involved in every bond and stock venture. Investment management education communicates that the risk of investing in common stocks can be broken down into two parts: systematic risk and unsystematic risk. Unsystematic risk represents risks unique to a corporation: its market share, name recognition, management, innovation, sales, reputation, profit margin, etc. This type of risk can be eliminated by owning a large basket of stocks in several industry groups or by investing in a well-diversified ETF, mutual fund or variable annuity subaccount. Unsystematic risk represents anywhere from 20-60% of the “risk pie.” The remaining risk, known as systematic risk cannot be eliminated through stock diversification. The only way to reduce systematic risk is by including other asset categories such as bonds, real estate and cash equivalents.

When it comes to deciding upon options for a client’s financial portfolio, money managers are strongly attracted to bonds. Since they prove to be the safest selection, compared with the risk of common stocks, bonds often prove to be a trusted and secure asset. Managers with an investment management education tend to be more skilled and experienced with money management. Clients build a trusted relationship in knowing that their money is in good hands and invested in secure bond options.

Author Bio: Cory Bowman is Director of Ops at the Institute of Business Finance. IBF has helped thousands of members of the financial services industry attain designations. For more information about money manager, investment management education, visit http://www.icfs.com

Category: Finances
Keywords: money manager, investment management education