Anyone who wants to retire comfortably needs to use investments to build a comfortable nest egg. Stocks and bonds offer much higher interest rates than savings accounts and certificates of deposits do, giving individuals higher rates of return. While many people have at least basic knowledge about stocks and the stock market, only a few truly understand how to invest in bonds successfully. These basic tips are perfect for those who are ready to dip into this exciting yet confusing world of bonds.
What Are Bonds?
A bond is similar to an IOU in that a company or other large organization, such as the government, will issue it to pay off their debt. The person who buys a bond is lending money to the organization, often for a long period. Over time, the bond will accrue interest, which is typically paid out twice a year, and the capital is generally safe for the length of the bond.
Benefits of Investing in Bonds
Bonds are the perfect choice for people who do not like much investment risk. These conservative investors appreciate the security of the principle. Moderate investors also like to add bonds to their investment portfolios to offset the risk of stocks. The best bonds are those issued by the federal government because the only way they are at risk is if the country fails. Bonds from very large, well-known organizations are the next safest option because if these companies falter, they are often able to pick themselves up again and begin making money.
Consider Individual Bonds versus Bond Funds
Individual bonds are those purchased separately from others while bond funds offer a variety of different bonds in one easy package. In general, bond funds are easier to work with and less hassle to purchase. Individual bonds should only be purchased by those who have a great deal of knowledge about investment banking or through the US Treasury.
How to Purchase Bonds
There are four main ways to purchase a bond or bond fund. The first is directly through the US Treasury, which can be done via their website with no additional brokerage charges. The second is through a broker. Brokers do typically charge commission and other fees, making the initial cost of the bond higher. New bonds, however, can often be purchased a third way, which is from the company or municipality without additional fees. The fourth way is through a mutual fund, which allows individuals to diversify their holdings.
Making Money with Bonds
As previously stated, bonds always return the principle if they are held to maturity. They also accrue interest income, which can be reinvested. However, most bonds take a number of years or even decades to mature, and some people will need their money before the bond matures. In this case, they can sell their bonds to a broker for a capital gain or loss. Usually, bonds are worth more when interest rates are low.
Understanding Bond Sell-offs
Sometimes the investment world will see a large sell-off of bonds either in a couple companies or in an overall sector, such as the corporate or governmental sectors. While some may see this as a dismal period, some investors, see this as a good thing. A massive sell-off can give investors with the right resources the ability to buy up large quantities of bonds for only a fraction of what they are actually worth. Should the economy or the sector rebound, these bonds will once again be worth more, giving the individual a huge gain.
Bonds can be a great source of investment income for many because they are the least risky type of major investment available. Those without much financial knowledge can easily invest in bonds through a mutual fund or through the US Treasury. Bonds can certainly be a great way to retire in comfort.