Questions you should ask yourself when thinking about investing in bonds
You might be considering investing in bonds but be a little hesitant because of the long-term nature and the low yield of most bonds. Here are a few questions that you might ask yourself when you consider investing in the bond market.
Do I know what bonds are? Before investing in anything, you should try to become as educated as possible. If you are considering investing in bonds, do some footwork and discover what bonds are and how they work. Basically, bonds are IOUs from a company or organization. The way they work is that you loan some of your money and the company you lend to promises to pay you back the money at a certain time and promises to pay to some amount, per year, for the privilege of borrowing that money. The money that they pay each year you will receive, it is called a "yield" and you might think about it as income.
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Do I know much about the company or organization? There are different types of bonds. US saving bonds are bonds that you buy from the US government. There are also bonds that are offered by companies. These "junk" bonds are higher yield than the US savings bonds. They are also higher risk, instead of being backed by the Department of the Treasury; they are backed by the owners of the business whose bond you are buying. If you are buying junk bonds, you should find out what you can about the company. Do you expect that they will stay in business (and thrive) during the period in which the bond is maturing?
Is my portfolio balanced? A bond is not only a safe place to invest your money; it is also either independent of or inversely related to other investments such as real estate and the stock market. If your portfolio consists of only stocks and money market accounts, you should consider purchasing bonds for the diversification that they offer.
Do I need the income? One of the greatest advantages of bonds is the income that they provide. You may be most interested in buying bonds if you are trying to increase your cash flow, not necessarily add to your nest egg. If you need the income, buy bonds. If you are cash flowing but looking to invest and take a chance on the money, maybe you should consider stocks.
Do I feel lucky? If you don't feel lucky at all, buy bonds. Bonds are low risk. In fact, the US savings bonds are so low risk that they are considered no-risk. If you are interested in predictable returns with no surprises, bonds are going to be a good option for you. The experience of owning bonds will be a lot like the experience of putting your money into a saving account. Only the interest you receive from the bonds will be greater than the interest you receive from a savings account but your money will be just as safe.
How much should I put into bonds? The answer to this question involves a lot of factors. You should consider your age when deciding how much money to put into bonds. In general, the older you are, the more money you should invest in bonds and money markets and the younger you are the more you should invest in stocks. However, other factors influence how much you should put into bonds. These factors include the rest of your portfolio (because you should be striving for balance) and your natural willingness to take risks.
