Bonds investment is one of the safest ways you can invest your money, depending on the type of bonds you select and how long you plan to hold the investment. The type of bonds you choose will depend largely on your financial goals, tax situation and the time in which you plan to accomplish your goals in.
After assessing your own particular financial situation and determined your financial goals, you can begin researching the type of bonds that best suit your particular situation. A bonds investment should typically be made on more than one type of bond in order to diversify the portfolio.
Diversification of a Bond Portfolio
Diversifying your bonds investment over several different types of bonds will assure that your bond portfolio will not be overly affected by an economic downturn. Having a bonds investment with only one type of bond could cause a problem in the event of insolvency or a ratings downgrade.
The ideal situation for a bonds investment would have the investor buy bonds of various different issuers and maturities, which would have the effect of diversifying risk. With several different maturities, an investor can better control interest rate risk.
Having a variety of issuers gives the portfolio a hedge, in the event that one of the issuers finds itself in financial difficulty. A well-diversified bond portfolio might include government, municipal, corporate and agency bonds, to name just a few.
By having a variety of issuers, the bond portfolio will be protected to a certain degree in the event of an economic downturn affecting one or more sectors of the economy. Notwithstanding, the investor should pay special attention to the issuer of the bonds and that the issuer is solvent and in good standing.
Buy and Hold
Buy and hold represents the most popular bonds investments strategy. By buying and holding bonds, your principal remains intact while the bond earns interest. Some bonds pay out interest twice a year, while other bonds sell at a discounted price, reflecting the amount of interest in the discount.
With a discounted bond, the issuer is obligated to pay the bondholder the full amount of the principal when the bond matures. Buying and holding bonds makes up one of the most conservative investment strategies.
Where Bonds Trade
Bonds generally trade on the Over the Counter market, or OTC, however some corporate bonds are traded on the New York Stock exchange. The OTC market for bonds includes major banks and other financial institutions which add a small premium to the price of the bond when acting as market makers.
A bond can be bought in the primary market, right after the issuer issues the bond; or through the secondary market, which is where the majority of bonds trade. To be able to purchase bonds on the primary market, you must have your bond broker notify you of the new offering and have a minimum balance in your account in order to participate.
Bonds investment is one of the safest forms of long term investing. Buying the right selection and variety of bonds is an excellent way to plan for retirement. Nevertheless, researching any investment thoroughly before committing your funds is strongly advised.