That means you dont want to only invest in stocks.
A balanced portfolio contains bonds as well.
Bonds are inherently low-risk investment options, but they also dont have the high potential earnings of stocks.
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Instead, buying bonds provides a hedge against riskier stocks.
Understanding when and how to invest in bonds is an important piece of your investment strategy.
What Is a Bond?
When you oughta buy something you dont have all the money for, you take out a loan.
They promise to pay back lenders (thats you!)
in a set number of years at the bonds maturity date, or when the bond ends.
The bond issuer also makes interest payments along the way, typically twice a year.
These are known as coupon payments.
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One exception: zero-coupon bonds, which dont pay interest until the maturity date.
Treasury Bonds
Also called T-bonds, Treasury bonds are issued by Uncle Sam.
They are entirely backed by the federal government, and theyre issued at maturities of 10 to 30 years.
The biggest draw of a treasury bond?
Its essentially risk-free unless the U.S. government goes under.
And if that happens, we probably have bigger things to worry about.
Did you know?
Interest on a municipal bond is exempt from federal taxes.
Unlike the previous two categories of bonds, these bonds are issued by companies.
If the corporation files for bankruptcy, secured creditors get paid in full before bondholders recoup their bond investments.
4 Benefits of Investing in Bonds
Investing in bonds has several key benefits:
1.
They Are Generally Safe Investments
All investing involves risk at some level.
You trigger the risk that they wont keep up with inflation.
You could also miss out on other investment opportunities that yield better returns.
But if youve got slim to no risk tolerance, these bonds may be up your alley.
(Default is a greater possibility with junk bonds, which are the riskiest corporate bonds.
They pay a high yield to compensate investors for their increased risk.)
This is especially important as investors near retirement age andcant afford as much risk.
Because bonds offer fixed income, theyre a popular investment choice for retirees.
In fact, another term for bond is fixed income security.
The same can be said of Treasury bonds, just on a larger scale.
Theyre Easy to Manage
If you dont use a financial adviser,playing the stock marketcan be tough.
When do you buy?
When do you sell?
Andhowdo you do those things?
3 Drawbacks to Investing in Bonds
Bonds are not without drawbacks.
Here are a few:
1.
However, the lower the risk, the lower the reward.
Compared to stocks, bond growth is minimal.
This is known as credit risk.
Another bang out of risk with bonds is interest rate risk.
Finally, there is liquidity risk.
Bonds, however, require you to wait until they mature to get the full rewards of the investment.
How Are Bonds Rated?
But where do such bond ratings come from?
In general, you should concern yourself with a bonds credit quality, maturity and yield.
At first glance, the rating system can be confusing.
BBB to Baa are also considered investment-grade bonds; they will not likely default.
Remember: Greater risk brings greater reward.
A bond rated as D is currently in default.
Individual Bonds vs.
Bond Funds
How much money you might invest in bonds depends on several factors.
Individual bonds issued by the U.S. Treasury, for example, are sold in $1,000 increments.
Bond funds (bondmutual fundsand bondexchange-traded funds) are alternatives to purchasing individual bonds.
Bond mutual funds and bond ETFs represent a range of investments all poured into a single bucket.
Want to go it alone?Get our tips for opening a brokerage account in 4 easy steps.
Frequently Asked Questions About Bonds
Are Bonds a Good Investment?
This depends on your goals and risk tolerance.
Bonds make more sense as part of a well thought-out, diversified investment strategy.
As you enter retirement, bonds can be a reliable source of fixed income.
How Much Do I Need to Invest Directly in Bonds?
This depends on the bang out of bond.
Its much easier to build a bond portfolio by buying shares of a bond mutual fund.
Can I Invest Directly in Bonds?
you could purchase most bonds through a broker.
If you are new to bond investing, we highly recommend working with a financial advisor.
Treasure bonds are the exception to the rule.
it’s possible for you to buy most government bonds directly from the government.
What Is a Bond Ladder?
At the end of the 10th year, the first bond will mature and pay out.
At that point, you will have an endless source of income with bonds maturing every year.
His work has been featured on Debt.com, Ladders, Glassdoor and The News Wheel.
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