Let’s do an experiment.
I am going to present with you with an investment decision with two options.
Please choose the one which will reduce your risk.
You have £100k.
A. You can invest your money by buying a 10-year bond with a 10% yield
This means you will receive £10k per year and your £100k back at the end.
B. You can put your money in a bank checking account which currently pays 10% APR
This means that if interest rates stayed at 10% then you again receive a total of £10k every year with your £100k initial capital still yours.
These investment options look identical if interest rates never change. But the rate of interest is not going to stay at 10%. To make it very clear I will let you know that interest rate are going to change tomorrow and will either be 5% or 15% but you do not know which.
Remember I’m asking for the option which reduces your risk.
Answer in a later post.