Bond investing, like gold investing, is a low return/low risk type of investment. But bond investing can be far more complicated than it looks. It may also happen that the company that has issued bonds ultimately goes bust, then the people who have participated in the process of Bond Investing by purchasing the bonds issued by that particular company have nothing to do but consider their investment as bad debt, an debt that cannot be recovered.
Many investors maintain a diversified investment portfolio consisting of bonds, stocks and cash in varying percentages depending upon their individual circumstances and objectives. Because bonds typically have a predictable stream of income and repay principal at maturity, many invest in them to preserve and increase their capital or to receive dependable interest income.
When investing in bonds, it’s important to remember that an investment’s return is linked to its risk. Risks common to most all bonds include:
1. Credit Risk – financial risk that the issuer will not be able to repay the principal upon maturity as promised
2. Call Risk – longer-term bonds are usually callable. The bonds may be called before the maturity date if interest rates decrease
3. Market Risk – if the bond must be sold before the maturity date, the bond may be worth more or less than the face value depending on interest rate movements.
4. Liquidity Risk – some securities are very hard to sell if there is a thin trading market or if the bond is relatively unknown.
Managing the various risks of bond investing is paramount to our overall fixed income strategy. Make sure that your risk tolerance is okay for the type of bond you have selected. Investors should also keep in mind that the more long term their bonds are, the more exposed they will be to interest rate fluctuations.
Know your needs Bond
investing doesn’t fit everyone’s
investment priorities.
