When you're in a bind, it means you're in a situation that could turn out to be dangerous. When the government offers you a bond, it means there’s an excellent chance the situation will turn into a payday for you. Bonds are a corporation’s or government’s vehicle for paying back the money you had loaned them to pursue their project needs.
No matter what happens to the money, bond funds are a government-IOU that promises to pay you back, with fixed interest, after enough time elapses (when the bond reaches maturity). There are many different types of bonds and bond prices, some of which inherently offer much higher risk and others that offer a safe, surefire investment opportunity (such as U.S. Treasury bonds).
The U.S. Treasury offers four specific investments, determined by the length of time until the maturity date is reached. Bills are the shortest term for maturing securities taking less than a year, notes typically reach maturity within 10 years, and bonds have longer maturities that typically take around 30 years to fully mature for bondholders. “TIPS,” or Treasury Inflation-Protected Securities, are specific to notes and bonds and adjust their interest payment amount based upon the Consumer Price Index (CPI).
Types of Bonds
Now that you know what bonds are, you need to know the significance of the many types. Individual bonds are a kind of simple interest, meaning they offer non-compounding building of fixed income through interest.
Below are the four main types of bonds:
- Corporate bonds: Offered by, as you might have guessed, corporations. They are typically used for buying necessary equipment for projects, paying shareholder dividends, etc. They are one of the largest, and most used in the U.S. bond market.
- Municipal bonds: Offered by government entities, such as states and cities. Subcategorized into “general obligation bonds,” “revenue bonds,” and “conduit bonds.” Typically used for financing debt and funding institutions, roadways, hospitals, etc.
- High-Yield bonds: Often the riskier of the four. Higher credit risk. Higher reward/interest rates.
- Investment-Grade bonds: Often less risky than the other four. Lower credit risk. Lower reward/interest rate risk.
What are 10 Good Bond Investing Strategies?
1. Know What Kind of Bond You Wish To Invest In
When it comes to investing, typically “long-term” is what comes to mind first. You put some money into a plan, which steadily builds up a savings account, which you can later withdraw for use during retirement or some major event you’d been saving up for. Bonds have the ability to be a short-time commitment or a long-time commitment. From there, you simply need to figure out what bond maturity length is best for your investment objectives.
Aside from the length of time, another consideration is how much risk you are willing to take. Like the old saying “the higher the risk, the higher the reward,” choosing a bond with more inherent risk to your credit quality forces the bond issuer to offer more of a reason for you to loan your money to them in the first place.
2. Don’t Be Afraid To Ask Questions
Sometimes, people don’t want anyone else handling their money, or they don’t want anyone else giving them advice on how to use their money. But handing money (especially handling investments like bonds) is a full-time job in itself.
Financial advisor jobs exist for a reason — and such advice should be given according to each specific situation. They can talk to you about interest rate changes, inflation risk, U.S government bonds, an investment portfolio, bond strategy, and so much more. The internet cannot answer questions specific to you unless you go out of your way to ask the specific question… which is often best left for actual experts and not armchair experts.
3. Know Exactly Why You Want To Invest in Bonds
Bonds offer predictable income to investors, paying out at least twice a year. Bonds can be a good starting investment due to the sheer assortment of types.
Ultimately, the only one who can answer the question of “why” is you. Why do you want to invest in bonds? Make sure that uncomplicated question can be answered prior to any big decisions, especially with long-term bonds.
4. How Legit Is the Corporation or Municipality You Want To Invest In?
Research is just as important when determining where an offered bond is coming from as ensuring that your “real gold” ring is not brass or a lower-quality metal. Investments can go wrong and figuring out the history of said corporation or municipality you wish to fund can help minimalize damage and ensure it’s a high-quality investment.
5. Why Might You Want To Sell Before a Bond Reaches Maturity?
Bonds are complicated, mostly due to how many fluctuations in investments they offer. Sometimes things don’t work out the way you expect them to, and waiting a decade for a bond to mature is unrealistic. It is essential to weigh the risk tolerance and benefits before a final decision is made, no matter how tempting jumping-ship at the time might seem.
Below is a simplified list of some pros and cons of selling a bond early:
Pros:
- If interest rates have fallen since the period of time from the original purchase, an “above par” sale will grant the purchaser a much higher value back.
- Allows for the prevention of incurring financial debt from a failing bond.
- The possibility of a “taxable gain” will allow the purchaser to earn money from an unmatured bond through the usage of taxation changes/influence. Moreover, a bond owned for more than a year typically receives a longer-term capital gain rate and a bond owned for less than a year typically receives a short-term capital gain rate.
Cons:
- If interest rates fall since the original purchase, a “below par” sale will grant the purchaser a much lower value back. The original “par value” (original purchase price) is unable to be offered back.
- The broker of the bond may force a “markdown” (lowered sale price from the original), to grant themselves a commission.
- The following are a few types of interest risks that play a variable in the success/failure of selling a bond early: legislative, default, call, interest rate, liquidity, and reinvestment.
6. Build That Portfolio
A financial portfolio can be made up of many things, including stocks, fixed-income investments, asset allocation, cash flows, new bonds, real estate, your-friend’s-potentially-great-invention, gold, cryptocurrency, various funds, and many other investment opportunities. Bonds can be yet another thing to add to your portfolio for diversification and to grant you a higher chance of earning your money back on your acquisitions and assets.
7. Increase Potential Investment Gains Through Bonds
The heading above is a complicated way of saying a very simple concept: investing in bonds can be well worth your time when done right. Running your investments logically is essential for success. Bonds allow access to a wide variety of assets, all with different term lengths, risk factors, and tendencies for risk and reward.
8. Observe a Successful Bond Investor
Monkey-see, monkey-do, right? School is supposed to be about earning an education to better yourself and your decisions. Watching a verified, successful bond investor do what they do best (investing) can help you achieve your own best practices. The bond market is forever changing, just like the stock market — so put some time into researching beyond the obvious to achieve a far better portfolio.
9. Don’t Rely Solely on Bonds
Investment is a wild beast that is best handled by more than just one weapon. If you want to invest in bonds — great! However, don’t let that be your only or your main investment. Diversify your portfolio to encompass stocks, real estate, and other market investments.
10. Swap, Climb, and Stagger
Although the title may sound like some strange workout, it instead pertains to the usage of particular techniques to ensure the best possible outcome for your bond investments.
Swap your bond by selling it, and then purchase another bond. Don’t have faith in your bond or do you believe you’ve found a better one? Then you can swap! However, it is important to keep in mind that such a quick movement can lead to tax implications and “wash sales” (sales where the IRS doesn’t count tax loss and other tax implications for a certain amount of time after or before the original trade date).
Ascend the astral plane of bonds through the usage of a diversified bond portfolio. A mix of short-term and long-term can mean the difference between staying at the bottom of the investment mountain and the peak. Stagger the maturities of your bonds to minimize the risk and non-risk of choosing only one style of bond maturity.
Now What?
Now it is time for you to go out there, into the massive world of investments and bonds, and take the next step to buy your first bond. Research, ask questions, and configure exactly what you want before you loan a single penny to a corporation or a municipality. After all, the only one left to make the final decision is and will always be you.
Sources:
Treasury Bonds: Rates & Terms | TreasuryDirect
Simple Interest Calculator: Bonds, Notes | Mathematics for the Liberal Arts Corequisite
What to Expect When Selling Municipal Bonds Before Maturity | Msrb
