Bond Market Investing

When the government or a corporation needs to raise money they usually issue bonds to do it. This allows investors to buy a small piece of the loan. Bonds can be a useful investment and should be part of all portfolios. Bonds generally don’t provide a great return but they are more stable than most other investments. This can help to keep your portfolio from experiencing the wild fluctuations that more volatile investments cause.

The first thing that we need to understand is just what bonds are. A bond is simply an instrument used when the government or a corporation need to borrow money. When you buy a bond you are lending them money. Most bonds are issued by the various levels of government however corporate bonds are also quite common. There are good reasons to invest in bonds but there are also reasons that you may want to look into other investment options.

The main reason that you would want to invest in the bond market is that over the short term they are safer than stocks. Over long periods, at least ten years, stocks will outperform bonds. However they also tend to be much more volatile. That means that over a shorter time frame there is a good chance that you will get a better return with bonds. Therefore if your investment time horizon is shorter, for example if you are near to retirement, you are probably going to want to go with bonds as the bulk of your investment portfolio.

The other reason that bonds are generally a safer investment is that you get a predetermined interest rate so you aren’t subject to the same fluctuations. That being said the value of your bonds will fluctuate, as interest rates go up the actual value of your bonds will decline. If you plan to hold your bonds to maturity this is no big deal, however if you are going to sell your bonds before they mature it will be a problem. Even if you do hold onto your bonds you are losing money since you are getting a lower interest rate than you would otherwise be getting. There is also the possibility that the lender will default on the bond, this can and does happen, in some cases even with government bonds.

Investing in bonds confuses a lot of people; they don’t really understand how the bond market works. You can buy bonds through your stock broker in most cases however it is usually a better idea to invest in a bond fund. Remember bonds do have risks attached to them and you need to research them the same as you would any other investment. This isn’t easy to do when you don’t really understand how they work. A bond fund will help you to avoid this problem since the fund manager will deal with most of this.