Investing in Bonds
Investing in Bonds as Part of Your Overall Asset Allocation Strategy
A solid asset allocation strategy often includes investments from a range of investment classes, the broadest of which include stocks, bonds, and cash. Investing in bonds can be an important element in your investment portfolio, helping to potentially:
- Reduce fluctuations in the overall value of your portfolio
- Enhance investment income
- Prepare for future expenses (e.g., college and retirement)
Investing in bonds can help you achieve many different investment goals, including income generation, portfolio diversification, and even growth.
Income generation. Traditional interest-bearing bonds pay interest on a regular basis, typically semi-annually, quarterly, or monthly. The payments on these bonds are fixed, which means the amount you receive with each payment generally remains the same. It's this regular schedule of fixed payments that can be appealing, especially for those investors who rely on a fixed income to meet living expenses. In fact, investors often move a percentage of their portfolios into bonds to meet annual living expenses during retirement.
Growth or total return. Though bonds are often used for their ability to generate income, it is also possible for them to turn into growth investments. This happens when interest rates drop below the interest rate the bond is receiving, which makes it an appealing investment for other investors and allows the investor holding the bond to sell the bond at a premium.
Because bond prices rise and fall inversely to rising and falling interest rates, when investing in bonds for growth purposes, you should be able to withstand the price volatility or be willing to hold on to your bond investment until maturity.
Your Financial Advisor can help you determine whether investing in bonds should be a source of growth for your investment portfolio.
Whether you invest in bonds and how you choose which bonds to invest in depends on a multitude of factors. In addition to determining a suitable mix of investments based on your financial goals, investment time frame, and risk tolerance, you need to be able to decipher:
Your Financial Advisor can help simplify the complex process of investing in bonds.
The bond market offers many choices, so it's important to have a clear picture of your goals before you begin selecting individual bonds to invest in. Other factors to consider when investing in bonds include:
- Your investment time frame
- Your specific income needs
- Your tax bracket
- Your risk tolerance
Contact your Financial Advisor to learn how investing in bonds can help you meet your short- and long-term financial goals. The two of you can work together to develop your investment strategy and determine how bonds may fit within that strategy. If bonds are appropriate for your situation, your Financial Advisor will help you select bonds that are most likely to help you meet your goals.
Investing in fixed-income securities involves certain risks, such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed-income investments may be worth less than original cost upon redemption or maturity.
Yields and market value will fluctuate so that your investment, if sold prior to maturity, may be worth more or less than its original cost.