Investing In Bonds - What You Need To Know
Bond investing offers almost as many options as investing in stocks. Bonds are a critical component of the diversified portfolio, and taking time to compare stocks vs bonds in terms of one’s investing goals is important to creating a balanced portfolio.
There are low yield bonds, often issued by government entities, that provide small but steady returns for little risk. There are higher risk, and thus higher yield, “junk bonds” issued by financially shaky institutions, typically companies struggling to raise funds. All of these bonds are available in the long and short term and are priced according to the mechanics of the debt market.
Bond holders tend to be first in line when financial troubles loom on a company’s horizon. In the event of bankruptcy, holders of the company’s stock will see their shares become worthless paper, while debt holders are given the proceeds of asset liquidation, etc. While this may end up being pennies on the dollar, the advantage of bond investing over owning shares of a failed company is clear.
Bond investing is not just for the individual investor. Some large mutual funds own a mix of stocks and bonds. Some will sell short stocks in addition to owning them. There are “opportunistic” funds that look for dislocations and inefficiencies around the world, and “market neutral” funds that reap gains regardless of whether markets are climbing or selling off — all seeking to maximize returns through the use of hedging techniques and the use of leverage, or borrowed money. The ultimate aim is simply to buy low and sell high in increasingly volatile, and therefore uncertain, global financial markets.
Getting a clear view of financial markets can be a challenge in itself. Mutual funds advice can be found on the pages of financial magazines and newspapers. Past performance is usually the main driver of many reviews of these funds. However, sophisticated investors today tend to want peace of mind, too. This typically means investing in a fund that follows a particular philosophy on controversial matters like labor practices and the environment.
A sound investment philosophy can fetch a hefty premium today, as global financial markets gyrate and exhibit a level of volatility not seen in many years. Even bond investing has its risks as uncertainty over interest rates and the global economy remain prominent issues on the mind of investors. But whatever the risk profile of the investor, there is likely a fund that will be a decent fit for one’s portfolio.
