So why choosing bonds is good for any portfolio??
We already covered the definition of Bonds in previous posts. But let’s do a quick recap – A bond is a loan to somebody (a corporation or government) with a fixed interest rate over a fixed period of time. Bonds are called “fixed-income” securities because they pay a fixed return (or coupon) based on the interest rate. Most bonds distribute earnings every six months, some quarterly, or even monthly.
Companies and municipalities use bonds to finance everything from real estate to machinery to routine operating costs. Buying a bond is akin to lending company money and they will pay you back later with interest.
So why choose bonds?
- Bonds provide consistent income; very useful when you’re living off of your investments
- Many bonds are considered lower-risk investments than stocks. For this reason, investors use bonds to minimize the volatility inherent with investing in the stock market. Theoretically, when you own a larger percentage of bonds than stocks, you should experience smaller swings in your portfolio’s value.
- As a rule of thumb, your portfolio should have a good mix of stocks and bonds. They compliment one another regardless of economic conditions. The ratio depends on your age of course and how risky you intend to be.
- Young investors shouldn’t use them as lower-risk replacement for stocks but as a less-volatile complement a portfolio of stocks.