Bond Brokers

Tips To Invest In Bonds

When it comes to investing, you may place bonds at the lower end of your priority list, given its lower risk and lower reward profile. But it makes sense to add a low risk investment to an otherwise aggressive portfolio for purposes of diversification. Remember that stocks and other highly volatile investments stand to make larger profits, hence the idea that greater risks beget greater gains. However, statistics are now being published that claim that bonds have traditionally outperformed stocks and not just in the short term. Depending on the length of time you decide to measure performance, you may find that bonds have outperformed the S&P 500. At any rate, bonds have a proper place in your portfolio as part of your diversification strategy and your asset allocation.

So, how do you get started with investing in bonds?

For proper portfolio diversification, you need to have a mix of investments such as stocks, bonds, precious metals and other asset classes. You may also want these assets to be in both tax-advantaged and regular accounts. Why? Because various investments don't move in lock step at all times. Many of them are not well-correlated, which simply means that their rates of return vary, along with their periods of strength and weakness. Since each investment vehicle is different, different economic conditions will affect them differently. This means that while one investment may be doing poorly, odds are that the other asset classes will be holding up, keeping your money safe.

With that in mind, here are a few tips you can follow when investing in bonds.

1. Understand how interest rates affect your bond investment. Successful investors know that interest rates have an effect on the bond market. Rising interest rates equate to weaker bond prices. But if you plan to hold on to a bond till its maturity, then you won't need to worry about the value of your bond; you'll still receive the rates earned from your bond by the time of its maturity.
2. Know which bonds to invest in. Know the differences between corporate bonds, municipal bonds and emerging markets debt. Buying investment-grade corporate bonds (and particularly, a bond mutual fund) is a reasonable approach to owning bonds because they may offer a good risk/reward balance compared to other bond instruments. Municipal bonds help investors fight off impending income tax increases because the interest income is tax free on these bonds. Government bonds from emerging countries may be something to consider as they offer diversification, which is a good thing given that some emerging countries have been less impacted by the current financial crisis.
3. Take a business approach to bond investing. In the world according to Warren Buffet, you should take the same approach to bond investing as you do to stock investing. This means that you should invest in quality businesses with sound management principles at a good value. If you'd rather leave the selections to experts, then consider some low cost bond funds for your portfolio.

Since bond investing isn’t nearly as risky as stock investing, bond investors have a little more wiggle room when it comes to making mistakes. Unless you invest in a company on the brink of bankruptcy, odds are that you won’t lose your entire investment before you can get out. But, it makes sense to do your homework and understand that a bond investment is a long term investment, meaning that it will take anywhere from 3 to 10 years or more to realize your profits. In the words of Buffett, investing is simple, but not easy. You will need to know:

• How stable is the company behind the bond
• The rate of return for the bond
• How likely your investment could default
• How your investment compares to other bonds in the market

If you have these main principles down pat, you will enjoy much greater success as a bond investor.