Looking to grow your money over time without too much risk? Bonds may be the right investment for you. Unlike stocks, which can have extreme ups and downs, bonds provide more predictable returns over time. Here’s why you should consider adding these fixed-income assets to your portfolio.
Getting Started With Bonds
Many new investors think of the stock market first when they have money to invest, but bonds provide an important balance in a portfolio. Bonds are essentially loans that you give to large entities like the government or corporations. In exchange for your investment, they pay you interest over a set period of time and return your principal investment when the bond matures. This provides a steady stream of income you can count on.
Understanding Bond Risks
All investments carry some degree of risk, but bonds, particularly government bonds, are among the safest options. While companies can go bankrupt, the odds of a government defaulting on bond payments are extremely low. The major risk with bonds is interest rate changes. If rates rise after purchase, the market value of bonds you hold may temporarily decline. However, investing for the long-term moderates interest rate impacts.
Laddering Your Bond Investments
One way to manage rate change risks with bonds is using a laddered investment strategy. This means buying individual bonds that mature at different dates or bond funds focused on short, medium, and long-term maturity dates. For example, your ladder might have some bonds maturing every two years over a 10-year timeframe. This provides steady income from near-term bonds being redeemed, while the longer-term bonds can still benefit from any rise in rates.
Finding the Right Bond Mix
Aim to diversify your bond investments across government, municipal, and corporate bonds along with short, intermediate, and long-term maturities. This mix can provide stability and income no matter where interest rates and the economy go over the coming years. Consult a financial advisor to help review your specific investing goals and create the optimal mix of bond investments tailored to your needs.
Bonds deserve consideration for at least part of your investment portfolio. Whether investing in individual bonds or through lower-cost bond funds, these assets provide a stable income stream along with diversification from the volatility of the stock market. According to Insider Intelligence, 85% of business leaders from wealth management firms reported that partnering with third-party providers was important for their company. Reach out to South Star Wealth Management today if you’re interested in finding a good investment strategy for your needs.