Is investing in bonds sexy again? What are the advantages of investing in bonds?
After the memorial-stock crazed pandemic years in investing, traditional and rationale investing seems to be having a moment. In fact, the traditional 60/40 portfolio (60% stock index and 40% bond index) seems to be doing quite well as of late.
What is a bond?
I do not think many people understand what a bond is. Whereas owning a stock is an equity position, where the investor owns a small sliver of that company and its future profit potential. Owning a bond makes you a kind of lender or small bank. You are part of a collective that is lending money to either a company or government entity to do something. Typically bond money is raised for capital improvements, and the bond holder is paid back a set interest rate over time and then when the bond matures they receive their original principal.
Investing in bonds offers several advantages that make them attractive to investors. Here are five key advantages of investing in bonds:
Steady income:
Bonds provide a regular stream of income in the form of interest payments. Unlike stocks, where dividends can vary significantly, bonds typically have fixed interest rates and predictable payment schedules. This makes bonds especially appealing to investors who prioritize stable income generation, such as retirees or those seeking a reliable cash flow.
Capital preservation:
Bonds are considered less risky than stocks and can serve as a means of preserving capital. When you invest in a bond, you are essentially lending money to the issuer, who agrees to repay the principal (the initial investment) at the bond’s maturity. As long as the issuer does not default, you can expect to receive your principal back, making bonds relatively safer investments compared to equities. investing in bonds
Diversification:
Bonds offer an effective way to diversify an investment portfolio. By including bonds alongside stocks and other assets, investors can potentially reduce overall portfolio risk. Bonds have historically shown lower volatility compared to stocks, meaning they may not fluctuate as much in value. This can help offset the potential losses incurred during periods of stock market downturns. investing in bonds
Here is how I incorporate bond funds and ETF’s into my “Ride My Bike Portfolio”:
Liquidity:
Bonds are generally considered more liquid than other fixed-income investments. They can be bought and sold on the secondary market, providing investors with the flexibility to exit their positions before maturity if needed. The liquidity of bonds allows investors to adjust their portfolios or take advantage of new investment opportunities without being tied to long-term commitments. investing in bonds
Risk management:
Bonds can act as risk management tools in a portfolio. They offer different types and durations, allowing investors to choose bonds that align with their risk tolerance. For instance, government bonds are typically considered less risky than corporate bonds. Additionally, investors can select bonds with shorter maturities to mitigate interest rate risk, as shorter-term bonds are less sensitive to changes in interest rates compared to longer-term bonds.
It’s important to note that while bonds offer several advantages, they also have their own set of risks, such as interest rate risk, credit risk, and inflation risk. Therefore, it’s essential to carefully assess your investment objectives, risk tolerance, and consult with a financial advisor.
See how we make use of bonds in a diversified portfolio:
What are your thoughts about adding bond funds to a diversified portfolio of assets? I mainly use ETF’s and Bond funds through Vanguard. But there are many options through Fidelity, Schwab, BlackRock and many many more! The bottom-line is that bonds are a kind of sleep well at night investment that can help smooth out the turbulence of the market. investing in bonds
For more on bonds, check out: https://www.bondbuyer.com/
