WHY INVEST IN BONDS?
Investing in the stock market is as exciting as watching Super Bowl. But bonds are not that appealing unlike other investment instruments. But do you know bond is a good instrument an investor should include in their portfolio? Let this article tell you.
Especially for novice traders, bond is a safe haven to your capital. If stocks represent equity, bonds represent debt. Therefore, bonds invest in debt, which is safer than in equity. Why? For instance, a company declares bankruptcy. On that note, debtholders will be paid first, then creditors, and shareholders. Shareholders often lose their whole investment.
Bond is also a safe investment. In the United States, Treasury bonds are considered risk-free. Stock market has no "risk-free" stocks. Although bonds, specifically bonds from a stable government, do not yield high returns, this is ideal for capital preservation. However, not all bonds are safe. There are also very risky bonds called junk bonds.
Stocks outmatch bonds most of the time. But there are certain times bonds surpass stocks. Since bonds grow slowly and are steady, it can neutralize the losses in a portfolio or ease the bumps in times of recession. Did we mention bonds have predictable returns?
At times, bonds are the sole decent option. The interest rates on bonds are usually greater than what banks pay on savings accounts. If an individual is creating an emergency cushion and does not need the money anytime soon, bonds can render a relatively higher return without too much risk. For example, you are preparing for your child’s education. At first, you may deposit the money for that. But if you are looking for a higher return and aim to shield that money from any potential risk, bonds can help you project investment earnings and find out the amount you have to continue to accumulate the needed amount for your tuition nest egg.
There are some cases where people need security and predictability. Bonds offer stable income. For example, retirees frequently depend on predictable income from bonds. It might be somewhat disappointing to retire into a bear market if the portfolio is comprised only of stocks. But if retirees own bonds, they can predict with a higher degree of certainty the amount of income they will have in their golden year.
After reading all of these, you decide to invest in bonds. But before doing so, consider all the important factors, including your investing timeline, financial goals, risk appetite, and perception of the market and income. There is no definite answer on the amount or percentage a person must allocate for bonds. It is a case-to-case basis.
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