Saving for major financial goals such as retirement or a college tuition takes time and investment. There are several different options for investing, and it’s important to diversify your portfolio. Learn why bonds might be a good choice for your savings goals.
What is a bond?
A bond is essentially an IOU from a government, corporation or other entity known as an issuer. In exchange for the bond, the issuer agrees to pay you back its face value as well as paying you interest over the life of the bond. There are several different types of bonds, including U.S. securities, corporate bonds, municipal bonds, mortgage and asset-backed securities, among many others.
Why bonds?
Bonds help diversify your portfolio. Bonds may not provide as much of a yield as stocks, but they’re usually more stable. They can help you achieve your long-term savings goals with less risk than volatile stocks.
Bonds provide a steady source of income. These fancy versions of IOUs pay semi-annually, so you know that you’ll get a return on a set date. Ultimately, you’ll get back what you paid for the bond initially while also earning interest the entire time.
Bonds are the most secure option next to cash. Because they provide such a steady source of income and are fairly stable, bonds are your next best option for saving next to cash. Use this stability to enhance your overall portfolio.
There are several factors to consider when deciding when to get bonds and what kind to purchase.
- Price and interest rates. Bonds move in the opposite direction of interest rates. They’re more expensive when interest rates are low, but they’re cheaper when rates are higher. Over time, this discrepancy evens itself out, so it’s important to focus on a bond’s maturity and view it as a long-term investment.
- Maturity. Bonds can be purchased for different lengths of time, including short, medium and long-term maturities. Short-term bonds are typically paid back in five years, medium ones take 5-12, and long-term are paid back in more than 12 years. Shorter terms tend to provide more stability but offer less rewards, while long-term bonds usually have greater rewards because to account for market fluctuations.
Bonds are just one of the many investment options you have for long-term savings. Whether you are looking to enhance your retirement funds or save for a college tuition, bonds are a fairly stable option for diversifying for portfolio.