Stocks attract most of the financial media’s attention while bonds rarely warrant a mention. Why is that? In part, it’s because bonds can be really boring. So, while that’s bad for the media, it’s great for investors. Bonds can play a key role in your portfolio, often as a counterbalance to stocks. Let’s talk about why.
What is a Bond?
Bonds are loans made between two parties that have a set interest rate and repayment schedule. Think about a mortgage: you borrow money from a lender to buy your home, and in exchange, agree to pay the money back with interest over time. Bonds work exactly the same way, except now you’re on the other side of the table.
How do Bonds Work?
When you purchase a bond, you lend money to an organization (usually a government or corporation), which agrees to pay you back with interest over time. So, suppose you purchased a 10-year US government bond at 2% interest for $1,000. That means the government will repay you the full $1,000 in 10 years, and pay you $20 per year for the next 10 years for the privilege of using your money. Not a bad deal!
There are a bunch of other factors that can impact the riskiness of a bond; two big ones to pay attention to are the length of the repayment period and the creditworthiness of the organization.
Why Invest in Bonds?
The goal is to generate the highest possible return at the lowest possible risk over the long-term. Historically, stocks provide greater growth potential with heftier risk, whereas bonds contribute stability with some growth. Pairing the two together is an opportunity to calibrate your portfolio to address your individual financial goals. Your mix of bonds depends on several factors, including your age, risk tolerance, and financial goals.
Schedule some time with our office to review your current asset mix so we can make sure your portfolio blend addresses your unique needs.
We're passionate about helping investors, and we'd love to help you!
Click my calendar icon to make your appointment to chat!
Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.