Investing in bonds is a good way for investors both new and experienced to create and maintain a portfolio. Still, no matter how much knowledge someone has about bonds and investing, it’s always good to have a checklist of what to know and expect before investing in bonds. Here are five tips for investors looking into the different types of bonds:
Know the pros and cons of investing in bonds before taking the plunge. Bonds are a safer investment during times of economic uncertainty and provide a reliable revenue stream that stocks cannot match during a bear market and/or recession. The safest bond is one with an AAA rating. In addition, bonds purchased from the government are as close to a no-risk purchase as possible.
On the other end of the spectrum, despite the enticing bond prices, avoid corporate “junk” bonds, which fall under the old cliché that if something looks too good to be true, it probably is. Junk bonds have delicious-looking double-digit yields that appeal to new investors hoping to make a quick splash, yet more often than not, these bonds don’t deliver on their promise and leave investors out their investment when the issuing companies go bankrupt.
Instead of corporate junk bonds, investors—especially those in middle and high tax brackets—should look into municipal bonds, most of which are exempt from state taxes. Investing in local municipalities and vital infrastructure such as hospitals and schools are excellent short- and long-term investments and will also provide the investor with the knowledge he or she is helping the local community.
Investing in bonds is a doubly good idea when interest rates are low. Of course, America has had historically low interest rates since the “Great Recession” began in 2008. Bond prices rise as interest rates fall, but come maturation, bonds themselves are exempt from the ebbing and flowing of interest rates. However, when rates are low as they currently are, the yield curve becomes very steep to compensate for the possible rise in rates. No matter what the interest rates are once a bond matures, the investor is highly likely to receive the money already invested as well as any interest.