Having spent 30+ years in the financial markets and now retired. I have experimented with Blogging and have been around the horn so, now I have come 360 degrees, and am returning to what I really Know! And that is, if you want to put your money into something that is safe and will bring you a nice return on your investment, you should consider investing in Bonds!
A Safe Haven for Your Money
Those just entering the investment scene are usually able to grasp the concepts underlying stocks and bonds. Essentially, the difference can be summed up in one phrase: debt versus equity. That is, bonds represent debt, and stocks represent equity ownership.
This difference brings us to the first main advantage of bonds: in general, investing in debt is safer than investing in equity. The reason for this is the priority that debt-holders have over shareholders. If a company goes bankrupt, debt-holders are ahead of shareholders in the line to get paid. In a worst-case scenario such as bankruptcy, the creditors (debt-holders) usually get at least some of their money back, while shareholders often lose their entire investment.
In terms of safety, bonds from the U.S. government (Treasury bonds) are considered “risk-free”. (There are no stocks that are considered as such.) If capital preservation – which is a fancy term for “never losing your principal investment” – is your primary goal, then a bond from a stable government is your best bet. But keep in mind that although bonds are safer as a general rule, that doesn’t mean they are all completely safe. There are also very risky bonds. These are known as junk bonds.
Slow and Steady – Predictable Returns
If history is any indication, stocks will outperform bonds in the long run. However, bonds outperform stocks at certain times in the economic cycle. It’s not unusual for stocks to lose 10% or more in a year, so when bonds make up a portion of your portfolio, they can help smooth out the bumps when a recession comes around.
There are always conditions in which we need security and predictability. Retirees, for instance, often rely on the predictable income generated by bonds. If your portfolio consisted solely of stocks, it would be quite disappointing to retire two years into a bear market! By owning bonds, retirees are able to predict with a greater degree of certainty how much income they’ll have in their golden years. An investor who still has many years until retirement has plenty of time to make up for any losses from periods of decline in equities.
Better Than the Bank…
Sometimes bonds are just the only decent option. The interest rates on bonds are typically greater than the rates paid by banks on savings accounts. As a result, if you are saving and you don’t need the money in the short-term, bonds will give you the greatest return without posing too much risk.
College savings are a good example of funds you want to increase through investment, while also protecting them from risk. Parking your money in the bank is a start, but it’s not going to give you any return. With bonds, aspiring college students (or their parents) can predict their investment earnings and determine the amount they’ll have to contribute to accumulate their tuition nest egg by the time college rolls around.
How Much Should You Put Into Bonds?
There really is no easy answer to how much of your portfolio should be invested in bonds. Quite often you’ll hear an old rule that says investors should formulate their allocation by subtracting their age from 100. The resulting figure indicates the percentage of a person’s assets that should be invested in stocks, with the rest spread between bonds and cash. According to this rule, a 20-year-old should have 80% in stocks and 20% in cash and bonds, while someone who is 65 should have 35% of assets in stocks and 65% in bonds and cash. That being said, guidelines are just guidelines.