Should I Be Buying Bonds?
With so many investment instruments out there, why should you put your money into bonds? What makes buying bonds an attractive option to so many investors?
Well, the real answer really depends on your investing philosophies
Buying bonds is often seen as a relatively safe investment because you are almost guaranteed to get your money back, on top of the amount of interest you will receive year over year. This hands-off, no stress kind of investments is the ideal way to park your money if you belong to the group of investors who are very conservative in nature. Of course, as you would expect with an investment with little risk,buying bonds does not yield as high of a return when compared with stocks or funds.
Besides appealing to the conservative investors, here are just a couple more reasons why buying bonds is really more appealing than it seems.
1. Good Source of Passive Income – One of the most important reasons people start buying bonds is to make consistent passive income. Almost all bonds come with an interest rate, either variable or fixed, and this provides the investor with predictability in terms of cash flow and income. While other kinds of investments such as stocks also offer passive income in terms of dividends, most are not able to offer the same kind of predictability or security that comes with bonds. Stocks predictability depends on the financial status of the underlying company and the price might fluctuate greatly during times of volatility.
2. Hedging against Inflation – Buying and holding a bond over the long haul exposes you to the risk of inflation. Suppose the inflation rate is 2% every year, your 6% annual interest suddenly doesn’t seem so appealing anymore. Furthermore, the principal which you will be getting back at maturity date will be worth less than the initial value of principal you have invested in the first place. Because of this, certain government bonds, such as US Treasury bonds raise their interest every year so that your investment is actually protected against inflation. This means that at the end of the bond term, you will not lose any money due to inflation.
3. Portfolio Diversification – If you have an investment portfolio, bonds help to diversify your investment because it is considered as a different asset class from stocks and funds. In times of volatility, bond prices to not fluctuate as much as stocks and funds, and because of this, they help to smooth out the volatility curve and dampen the impact of negative swings.
Placing your money in a more conservative vehicle such as bonds will yield you less potential return over time, but allocating a certain amount of money to invest in it is a very prudent decision given the amount of benefits it brings to the table.