Investing In Bonds: 10 Tips
Investing in bonds: 10 tips is a way to earn safe, secure money. Bonds are simply loans that an entity like a bank owns. A certificate of deposit (CD) is a bond that many people are familiar with. Individuals can invest in CDs at their banks. At the end of the term, ideally the person gets their investment back plus interest. Other types of bonds are mortgage-backed securities, municipal bonds, U.S. Treasury bonds, bond mutual funds, and fixed annuities. These 10 tips for investing in bonds can be helpful in navigating the bond investment market.
- Buy low risk bonds. Bonds with the lowest risk are U.S. Treasury bonds. The next lowest risk bonds are these federal government agency home mortgage bonds: Ginnie Mae, Freddie Mac, and Fannie Mae. Know the risk when buying bonds and buy according to your comfort level.
- Stagger the maturity date of bonds. The practice of buying bonds with different maturity dates is called laddering. This allows you to get your money back at set intervals, such as every six months or once a year. This avoids having to wait until all of the bonds mature at one time.
- Buy bonds to diversify. Choosing bonds as part of your investment portfolio allows a measure of safety if stocks plummet. Diversify your entire portfolio and buy the bonds along with stocks. Bonds are generally safer so offer a good mix to a portfolio.
- Compare bond yields. Yield is the amount you get on your return. Each bond has a different yield. Comparing bond yields lets you make an informed decision. You ultimately are responsible for choosing your investments so keep on top of the yield to know when the best time to sell is.
- Choose safe bonds. Bonds that mature in less than 5 years are safest. The longer the maturity rate for a bond, the riskier that bond is. Consider your risk level to buy the best bonds for you.
- Stay away from riskiest bonds. The riskiest bonds are junk bonds, high-return bonds, or long-term bonds. Long-term bonds are those that take 12 years or more to mature. The greater the return, the riskier the bond will be.
- Buy bonds for less volatility. A bond that is volatile is going to be riskier than a bond that is stable. The price fluctuations of bonds is generally low. If you are looking for bonds that are stable, pay attention to the bond when you buy it to find a bond that will remain stable throughout its term.
- Get regular income from bonds. Bonds are stable and can offer a regular return on money. By laddering or staggering the maturity date, it's possible to have a regular income from bonds. if this is an important factor, keep in mind when you will need the funds to stagger the bonds accordingly.
- Hold onto bonds until they mature. Selling a bond before it matures can result in as much as a 20-percent drop in value. It is possible on volatile bonds to sell them before the maturity date and still earn money, but that is the exception. Generally, it is safest to keep bonds until they mature.
- Buy bond mutual funds. Interest can be compounded on bond mutual funds. The interest is not compounded on individual bond funds. The power of compound interest is a serious consideration when large dollar amounts are being invested.