When it comes to bonds, many investors will buy into them without fully understanding what they’re getting into. You have to think about things such as your risk tolerance, your age, better alternative investments, and your short and long term goals. In this section, you’ll learn why bonds may be a great investment. But if none of them seem to fit your investing personality, then consider other options.
1. Lower risk than stocks
When you purchase stocks, they come with a long list of variables that can cause prices to go up and down. First on the list is whether the company will meet the earnings or profit expectations put forth by stock analysts. If they fall short of expectations, look for the stock price to drop.
But from there, prices can fluctuate wildly based on changing technology, rumors, overall economic outlook, consumer sentiment, politics, war and peace, competition, interest rates, and more. Even the freakin’ weather can impact the price of some stocks. It’s enough to make your head spin!
Of course, because stocks can swing all over the place, therein lies opportunity. For example, a positive rumor about a new product that a company is set to release could cause the price to shoot up significantly. If you’re holding shares of the stock and decide to sell them, that could translate into a huge windfall profit for you.
Conversely, a negative rumor could cause a company’s stock to plummet. If the rumor turns out to be true, then you’d be forced to hold on to it for a while or sell at a loss. Naturally, if the rumor is false, new investors could grab shares at bargain prices.
So when you’re dabbling in stocks, it can be a crazy game. Sure, you can make a ton of money overnight, but you could lose your shirt just as fast, too.
Now when it comes to the bonds market, you won’t encounter significant volatility. When you buy your bonds, you’ll be paid a fixed interest amount on a scheduled timeframe. And when the end date (or maturity) of the bond is reached, you’ll get your original investment amount back. It’s pretty straightforward.
The two biggest elements that can rattle bond markets are the broader market interest rates in the economy and bankruptcies.
Market interest rates could impact the price of your bonds if you want to sell them before their maturity dates. More on this in the next section of this guide.
Aside for that, if you buy corporate or government bonds and the organization files for bankruptcy, that could cause you to lose the interest you’re owed and your original investment. But the good news is that such occurrences are rare.
2. Pay more than savings accounts, Certificates of Deposit (CDs), and other money market instruments
Without a doubt, putting your money in savings accounts and CDs are the safest kind of investments. They are even slightly safer than bonds from a pure risk standpoint.
One big reason that these investment instruments are safer than bonds is because they are covered by Federal Deposit Insurance Corporation (FDIC) insurance. What this means is that they are protected just like the cash in your checking account.
So if the bank runs into financial trouble and has to close down, you’re guaranteed to get your money back. Stocks and bonds don’t have this level of protection, even if you go through a bank to buy them.
As you might guess, because money market investments such as CDs are virtually risk-free, they’re not going to pay out as much as bonds. I should stress that this is based on a historical perspective. That’s because there have been times in history where money market funds were a better haven for your money than stocks or bonds.
3. Short term investment fund
The common notion is that because bonds are a safe investment, they should only be purchased by grandma and grandpa. And if you’re young, many money experts say to stay far away from these securities.
For most people, I concur with this investing wisdom. However, there are times when a young person could strategically use bonds as a short term investment vehicle.
Let’s say that you plan on buying a home or making some other major purchase in a couple of years. Sure, you could put that money in a very safe savings account that pays very little in interest. But why not instead look into a 2 year, high-quality bond that will pay a higher interest rate?
This could easily be a happy comprise when your other alternatives are to invest in a volatile stock market or a weak money market account.
4. More predictable and steady income stream
When you reach retirement age, you’ll probably leave the job market entirely or work part-time. No doubt, you’ll want a predictable and steady income stream.
It would be extremely difficult to achieve this goal if your investment portfolio consists of only stocks. As discussed earlier, the stock market is highly unpredictable.
However, since bonds have fixed interest rates, you’ll know exactly how much money will be coming in each year.
5. Diversify your investment portfolio
As you wisely contemplate the lifestyle you want in your retirement years, you must design an investment portfolio that will deliver the security and comfort you want.
So in your twenties, your portfolio may consist of nearly all stocks. And that’s not a bad thing at all. But as you ease into your forties, fifties, and sixties, it may be smart to begin diversifying your portfolio with more and more bonds. This is not to suggest that you should get to a point where your portfolio consists of all bonds.
The point is that as you age, your portfolio will have less time to recover from severe or long-term drops in the stock market.
It’s true that bonds will likely lower the high profit potential that stocks offer, but they will also help you sleep a little easier at night because of the reduced risk.
If you don’t have a game plan for your investment portfolio yet, and need some guidance in this area, then check out our article….Designing Your Investment Portfolio
So there you have it. Bonds can be a great investment. But they are really geared toward people who are either risk averse, looking for a short term saving vehicle, or nearing retirement. If you fall into one of these categories, then great. But if not, seek out other investment vehicles more aligned with your financial goals.
|Page 1||Page 2||Page 3||Page 4||Page 5||Page 6|