What You Should Know About Investing in Bonds
When you invest in bonds, you’re giving a loan to the company or government who issued the bond. That means every bond is a promise from the issuer to repay you for the price of the bond at a set date in the future called the maturity date. Bonds also pay you interest along the way. Those interest payments, also called the yield, are how bonds can provide you with fixed income.
Unlike stocks, the bond issuer is required to pay their investors according to the contract of the bond. This means bonds can be less volatile in the short term than stocks. That lower volatility comes with a tradeoff: historically, they have lower returns than stocks. Our view is that when you invest for retirement, bonds’ purpose in your portfolio should be to help mute some of the short-term volatility associated with stocks. Much of the long-term growth in your portfolio will generally come from stocks and not bonds.
The Many Types of Bonds
You have access to a whole universe of fixed income securities, so knowing the difference between them is crucial. Let’s review the common types of bonds you might use to bring diversity to your portfolio.
Government Bonds:
Government bonds are issued by sovereign nations. They include US Treasurys, UK Gilts, Japanese Government Bonds and German Bunds.
Agency Bonds:
Agencies and divisions of the US Federal Government, and organizations sponsored by those agencies, issue their own bonds. These agency bonds may have similar characteristics to Treasurys and can be backed by the US government.
Municipal Bonds:
Municipal bonds, sometimes called “munis,” are issued by states, cities, counties and other government entities. Generally, the interest earned on municipal bonds is free from federal income tax.
Corporate Bonds:
Private and public companies can issue bonds, too.
Bonds May Bring Stability to Your Portfolio
You’ve worked hard to build your nest egg, and now you can put it to work. Bonds may be appealing because of the steady source of income they provide, but it’s important to understand how they work. BRH Capital can help you discover the pros and cons of bonds.
Corporate bonds can generally be broken down into two broad categories:
Investment Grade Bonds and High-yield Bonds (also called junk bonds). High-yield bonds tend to offer higher interest rates, but they are riskier due to a greater likelihood that the issuer could default or not be able to repay your investment.
Investment-grade bonds are issued by more established corporations and in generally have lower risk—and lower interest payments.