One of the most important things you want to learn when you are new at investing is to put your money into something safe and harmless so that it will last. Besides putting your money into the bank most people believe, that buying bonds are the correct thing to do. In owning bonds, this financial product don’t have large market swings like stocks, so most people feel comfortable in having bonds in their portfolio.
However, there are still a large group of people who think that it is best to put your money into the bank for safety. But with the banks paying such small amount of interest, there is another group of people who believe this is not a good option as you are not getting a good return on your funds.
In deciding to buy bonds, you have the safety of owning a financial instrument that you don’t have to worry about at night while you are sleeping. You also will get a steady income from the interest payments that are paid to you every six months while you own these bonds or until the bonds reach maturity.
In receiving this type of introduction to bonds you would probably say to yourselves, sign me up now, I don’t need to hear any more. Most of us will agree and go out to buy bonds as it’s better than leaving our money in the bank, where your investment returns will be close to nothing ( less than 1% rate on your bank deposits).
The only risk that you have to take into consideration in owning bonds that may have some financial problems later on which may preclude them from paying their interest payments. If this does happen, they may go into default and that isn’t good. However, this rarely happens, as the company that issued the bonds don’t like to upset their bondholders because they may have other bonds coming out later.
However, it’s important to note that a default can occur but primarily to the smaller companies or the less well-known corporations. These small companies will pay their bondholders these large interest payments of greater than 10%, which is very attractive. These companies pay these high rates to attract investors because they are unable to borrow funds in the regular marketplace to fund their expansion and to cover their cost.
I know about this type of tempting investing because I once fell into this trap of owning a high-interest bond, that was paying over 9% annually. This company paid me the high-interest payments of over 10% for two years and I was happy. But suddenly the company ran out of money and went into default. In going into default, my investment into their bonds was lost, causing me to lose my money.
Based on my unfortunate experience, and you still want to invest in bonds you have to make sure that your purchase bonds from the larger ” blue chip ” corporations like IBM, Merck, Exxon, AT&T and so on. Owning bonds in these larger name companies lowers the risk that they will not pay their debts. These solid companies have been around for years and you can count on them to pay you your money back when the bonds do mature.
I’m bringing this issue to your attention because, in a period where everyone is looking for high yield on their money, they may get tempted to invest into financial products that are far too risky. In investing these types of bonds, it may appear that you are making a safe investment, and when you go over the fine details, you are not. In the end, you may lose your money like I did and that isn’t something that I don’t want for you to experience as it hurts badly.
Hence, bonds are a good investment to put your money into, under certain circumstances. If you are over forty years old, you should start to increase your investment into bonds because of the safety feature that it provides. As you age, safety is much more important that taking a high risk to go after large profits.
For the new investors who are younger than forty years old, they should invest heavily in financial products which have an upside growth potential, like quality stocks, and mutual funds. Since this age group are younger and have time in their favor, they can take a chance in investing in financial instruments that allow a little more risk. In doing so, you may hit it big and when you do you will be set for life.
As good as it is in owning bonds, you need to also know that investing in bonds will give you a fixed income stream, but if the interest rates do rise, the value of your bonds will go down. The value of your bonds will go down in periods of rising interest rates because your bonds, which will have a fixed interest rate of 3 to 4 %, will no longer be in demand. The newer bonds that will be issued will have interest rates greater than 4% making your bonds no longer attractive.
For this reason, I’m suggesting that you don’t buy bonds that have ha maturity date greater than five years. In doing so, if the interest rates do rise, your money won’t be locked up for twenty or thirty years, which many of the bonds do. In owning bonds for five years or less, you are actually protecting yourselves just in case the interest rates do rise. At that point, you can get out of the lower interest paying bonds, by selling them, or wait until they mature. Once you are at this point, you can invest in the newer bonds that will be paying you a higher interest rate.
In closing, bonds are a good investment and you should buy them if you have money that is not giving you a reasonable return on your money. However, there are certain conditions you have to be on the lookout for in buying bonds which I have outlined above. It’s very important that you become familiar with the details of the bonds you buy so that you get the most out of your money and not suffer a loss of your funds. I hope this article helps you to realize the facts associated with buying bonds because owning a bond isn’t totally safe as you may think it is. Finally, I got burned by not looking at the fine details of owning a bond, and I don’t want you to do the same.