It seems like everyone is always talking about investing as the route to wealth, but they’re not sharing all the details. It’s not like you drop some money on a stock or two and walk away a millionaire; you have to know how the stock market works, how to tell if something is a good investment, and perhaps more importantly, strategies to protect yourself against painful losses. You also have to watch what’s going on in the economy. The stock market is going up and down in the first quarter of 2021. Many including famous investor Charlie Munger believe that the stock market is in a bubble that’s about to burst. If the market is too high, then what are other smart investment options? Are bonds an option for you? Which bonds should you buy?
While most people might be able to give you a rough idea of what a stock is (a share in a company that you buy in the hopes that it will increase in value), not as many people can rattle off the definition of a bond. No one seems to share “hot bond tips” for your portfolio. Bonds are just as important to your investing strategy as stocks are. Depending on the bond you choose, it can give a good, dependable return and help you balance the volatility of the stocks in your portfolio. Currently interest rates are low – nearly non-existent rather – but they may go up with a market recession which makes bonds a good move.
Always Do Your Research
It’s really important to know exactly what you’re buying before you invest. You’re basically loaning a company or a government some money, and they’re promising to pay you back with interest. But as with any loan, the interest rate, term length, and creditworthiness of the lendee makes a difference in whether you want to lend them money.
You might be loaning money to the biggest corporations or governments in the world when you buy a bond. The most dependable bond issuers are called “investment-grade.”
Harry Dent is fond of bonds for these days of volatility. He claims:
“This is a time to be safe, and you can be in high-quality bonds that are giving you a 2%, 3%, 4% dividend, better than most stocks, and in deflationary times and bubble crashes like this, like the 1930s, the triple A corporate and the Treasury long term treasury bonds of the U.S. doubled in value in that decade while paying you a dividend a better than stocks. So this is not making nothing. It’s preserving your wealth, accepting less gains and hoping you miss the biggest crash and now you can reinvest it in areas where you will make a ton of money.
You could have bought anything in 1932, ’33 and made money for the rest of your life. Same thing in 1974, ’82, and those big crashes. Those are once in a generation crashes. This is a once in two-generation crash. That’s why I’m saying it’s not just another correction. It’s not even another deep correction. This is the crash of a lifetime, which will turn into, for smart investors and businesses, the sale of a lifetime on financial assets and the time to invest more heavily than ever, but that’s about three years away give or take by my calculation.”
Stay Away From Junk Bonds
When buying a bond, it’s probably best to stay away from “junk bonds” unless you’re truly an expert. While they do offer high yields, that’s because those bond issuers don’t have as good credit. They just might default and leave you holding the check. A junk bond is a high-risk, high-yield security, usually from a company trying to raise money fast. Often, they are trying to take over another company, or buy more of themselves. Some notable companies with a credit rating that puts them in “junk” status include Occidental Petroleum (NYSE:OXY), Ford (NYSE:F), and Tesla (NASDAQ:TSLA), according to Motley Fool.
“The High Yield Bond Fund, which invests exclusively in higher-quality junk bonds, pays investors nearly 35% more interest than the investment-grade bond fund. That’s a lot of extra income potential; moreover, plenty of individual junk bonds offer even higher yields. That’s why high yield bonds can be appealing investments.”
Best Time to Buy Bonds
Obviously, you’ll get a better return if you own your bonds when interest rates are super high. But unless you have a crystal ball — and a never-ending stream of cash — you will probably have to work with what’s in front of you. Trying to time investments is tricky to begin with, and because so many global events (like a pandemic, for instance) can have repercussions down the line, including an effect on bond prices, getting in at the “best” time is easier said than done. If your goal is to diversify your portfolio, then there’s no time like the present to add bonds to your investment mix.
Bonds Are Considered Safer Than Stocks
While historically, bonds are safer than stocks, they still have some associated risks. This includes interest rate risk, which occurs when market rates rise and we find that we’re earning less from a bond than we could with other investments. There is also inflation risk, when a high rate of inflation lowers the value of the interest. Other risks include liquidity risk, which means it isn’t possible to find a buyer when the bond owner decides to sell.
Some bonds are safer than others. A government or council bond may be safer than one issued by a company. The downside is that safer bonds tend to have lower interest rates than riskier ones. Some bonds are “rated”, which means they have a credit rating as a guide to how risky they are. If a bond is “senior”, it means that if the company or government fails, the holder will have a higher priority in the queue of people trying to recoup their money. If the bond is “subordinated”, we will be further down that line.
Subordinated bonds are more risky than senior bonds and will usually have a lower credit rating. As with any investment, it pays to do homework and to get professional advice before investing in bonds – particularly if there is a chance you will sell before maturity. The Financial Markets Authority has more information on how to protect yourself when you invest in bonds.
Summary
For many people, buying bonds is a strategic part of their overall investment portfolio. It allows you to balance the volatile performance of stocks and similar equities with a more consistent, if lower-yielding, return. Whether you buy bonds directly or through your broker or another source, bonds can be an important piece of your investing journey.
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