The latest finance news online has investors worried about the potential setbacks when it comes to their portfolios. Experts say look to the overall investment strategy because although stocks have been volatile, bond investing right now carries less risk.
Why Bother With Bonds?
Bonds dilute the amount of risk in your portfolio. They are a simple loan for a fixed length of time, and in return you get a fixed dividend every period and your money returned at the end of the term. Unlike buying a stock, where little is promised, but the potential reward is unbounded, with a bond everything is spelled out.
When the borrower is a bank, these agreements are called certificates. When the borrower is a government or a corporation, these are called notes or bonds, depending on the length of the loan.
They have a face value – which is the amount you’ll get back at the end of the term of your agreement, and a coupon which specifies the fixed dollar amount you’ll receive every year as interest, in either monthly or semi-annual payments. The coupon rate never changes; that’s the reason that bonds are called fixed-income investments.
So, bonds can assure you a stable income stream, but the market value of the bond can fluctuate over the term. In fact, it varies every time interest rates change.
Bonds Can Be A Safe Bet
Stocks have been a ticking time bomb all year, and experts point out more and more novice to moderate investors looking to build their retirement nest eggs are seeking ways to take as much risk as they can comfortably live with. Additionally, when it comes to finance news online, you can see that the bond market is doing good.
Bonds are issued to raise money for corporations, localities and the government. The primary and secondary bond markets are an essential part of the capital-raising process. They are bought and sold in huge quantities around the world. Some are easier to buy and sell than others, but that doesn’t stop investors from trading all kinds of bonds virtually every second of every trading day.
With any bond, you loan your money for a specific period of time in exchange for periodic interest payments on specific dates of fixed amounts. And at the end of the term, you get your full investment back. When dealing with government bonds, it is all guaranteed, and that’s pretty safe.
What Can Go Wrong?
If you’re chasing high-yield bonds from companies with low credit ratings, called “junk bonds” you may find trouble instead of stability. These junk bonds are risky and they tend to find disaster looming at the same time the stock market does.
Overall, if your strategy is to cushion your investments to ward off risk, then high-quality bonds will add stability.
