Good morning, friends! 🌅👋

Investing usually makes us think of either stocks or bonds—but there’s a hybrid option that sits somewhere in between. It can help you participate in market gains without fully exposing yourself to the ups and downs of stocks.

Think of it as a middle ground ⚖️ — a way to dip your toes into the market if you’re skeptical, or a way to balance risk in your portfolio—whether you want a little more growth than bonds offer, or a little less volatility than stocks.

I also put together a short video explaining how this works and why some investors choose to merge it into their broader strategy — you can watch it here. 🎥

Take a look and see if this approach fits your comfort level and investment goals.

In your corner,

Daniel

FINANCIAL TOOL
A Middle Path When Markets Feel Expensive

Right now, the markets are sitting at a crossroads.

• Stocks don’t appear to be in a bubble, but they’re not cheap either. 📈📉 

• Interest rates are likely to start sliding, but no one knows how quickly. 🕰️

• Between now and the end of 2026, I see U.S. markets potentially ending anywhere from slightly down to up 20–30%—with a more reasonable growth rate in the single digits. 📊

But that’s my long view.

In the meantime, the next 12–18 months? That’s anyone’s guess. Consistent accuracy in short-term predictions are nearly impossible because world events are largely random, and investor psychology can turn markets on a dime.

So, for investors who don’t want to gamble their portfolio’s intermediate-term future, the question becomes:

“How can I protect myself if markets stumble, but still have a chance to gain if they soar?”

The answer might be hiding in a corner of the market most beginners never hear about: convertible bonds.

What’s a Convertible Bond? 💡

Think of it as a hybrid between a traditional bond and a stock option:

1. It’s issued by a company, just like a regular bond.

2. It pays you interest (coupon payments) on a fixed schedule.

3. At any time before it matures, you can choose to exchange it for a preset number of shares in the issuing company.

In other words:

• If the stock performs poorly → you keep collecting your bond income.

• If the stock rallies → you can swap the bond for shares and enjoy some of the upside.

A Realistic Example 🔍

Let’s say:

• Par Value: $1,000

• Maturity Date: 3 years from now

• Coupon Rate: 4% annually (paid in cash)

• Conversion Ratio: 20 shares per bond

• Current Stock Price: $45

If you bought the bond today:

• You’d earn $40/year in interest if you simply held it to maturity.

• You’d only convert to stock if the shares rose above $50 (20 × $50 = $1,000), because that’s when the stock value would beat the bond’s par value.

Upside Example: Stock goes to $60 in two years.

• 20 shares × $60 = $1,200 value.

• You could convert and make a 20% gain, plus keep the interest you earned before converting.

Downside Example: Stock drops to $30.

• 20 shares × $30 = $600. No problem. You hold the bond and keep collecting interest.

• As long as the company stays solvent, you get your $1,000 back at maturity.

Why Might Moderate-Risk Investors Use Convertible Bonds Now? 💭

The next 12–18 months could be a coin toss 🎲

• If markets drop → convertible bonds usually hold value better than stocks, and falling interest rates could even increase their price.

• If markets rise → you may capture part of that upside through conversion if the stock prices rise high enough.

• If markets go sideways → you still collect steady interest.

*These outcomes are illustrative, not predictions

What’s the tradeoff? ⚠️

• Lower interest than a traditional bond of the same maturity and credit quality (because of the built-in conversion option).

• Interest rate risk (bond prices can dip if rates rise).

• Credit risk (if the company defaults, both bond and stock suffer).

For investment-grade issuers and shorter maturities, the interest rate risk and credit risk can be kept relatively low.

How to Invest 🧩

Buying individual convertible bonds is complex for beginners.
Another way investors may gain exposure is through convertible bond ETFs.

• You instantly get diversification across many companies.

• You can choose ETFs with shorter durations (around 3 years or less) to reduce interest rate risk—especially important with today’s U-shaped yield curve.

• Liquidity is higher, and there’s no single-company risk.

Summary 🔑

Convertible bonds let you:

• Sleep easier than a stock-only portfolio, especially when stock prices are already high. 💤

• Keep more upside potential than a plain vanilla bond portfolio. 📈

• Position yourself for the unpredictable next 18 months without fully committing to “risk-on” or “risk-off.” ⚖️

When markets feel like a tightrope walk, they can be a smart middle ground for moderate-risk investors with an intermediate timeframe in mind.

Daniel Lancaster, CFA

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