6 reasons you should probably invest in bonds
Stocks and bonds are the two staples of the investment world. Stocks are investments where the investor buys a percentage portion of the company and as the company increases in value, so does the value of each percentage portion of the company. Bonds, on the other hand, work as the investor is paid interest to lend money to the company (or government). Bonds are basically IOUs that are purchased are guaranteed to be paid back and with interest. There are at least six good reasons that you should probably invest in bonds.
The payout is guaranteed. If you buy stocks, you are not guaranteed any return on your investment. When you buy bonds, you are guaranteed to get your money back plus the extra money that you receive as interest. The interest is called the yield. Say you buy a $1000 bond with an 8% yield. That bond will pay out 80 dollars for every year that it is invested. If the bond is a 10-year bond, your $1000 initial investment will mature and you can get your initial investment back having cleared $800 in yields. You can count on getting back exactly what you put in plus the yield.
|
|
The risk is lower than with stocks. If you invest in a 15-year bond with some company and it goes belly up over the course of those 15 years, you have a better chance of seeing your money again than you would have if you had purchased stocks. The obligation to pay back investors is first to the bondholders and then to the stockholders.
Bonds and interest rates are inversely proportional. Generally speaking, as interest rates increase, bonds decrease and as interest rates decrease, bonds increase. Decreasing interest rates may negatively impact other investments. You will help protect yourself from fluctuations in interest rates, it is a good idea to diversify your portfolio by investing in bonds.
Bonds provide income. Stocks only payout when you sell the stocks. Similarly, your investments properties tie up your money until you sell. The benefit of bonds is that they continually generate some income. You will receive checks in the mail (or electronic deposits) by just owning a bond. This is a terrific benefit if you need a cash flow for day-to-day living.
Bonds are affordable. You don't have to be rich to invest in bonds. Some bonds cost as little as $50. These bonds make great gifts, as they are able to teach about investment with out putting up too much "real" money. Children can learn that they get $5 every year, just for having this piece of paper. When they get older, those same children might be very interested in receiving $1000s of dollars every year, just for having other pieces of paper. Because bonds are so inexpensive, anybody can invest in the bond market.
Bonds offer a tax advantage. Some bonds, such as I Bonds allow you to defer federal taxes for up to 30 years. Furthermore, the yield received from bonds, and used as income, is exempt from both state and local income taxes. This option of a "tax-free" income will be quite attractive to most people.
There are plenty of other reasons to purchase bonds. By investing in bonds, you are diversifying your portfolio. The key to making the most money over a long period of time is to make allocate your assets into a number of different markets that works differently from one another. If you hare not currently invested in bonds, investing now will help you to properly balance your investment for the greatest long-term stability.
