There’s a lot of ways to invest money and grow a portfolio: stocks, commodities, mutual funds, and more. But the safest and most guaranteed method of securing returns would have to be bonds, be it public or private. Before getting into the different kinds of bonds, we should define it off the bat. A bond is a security. You buy it on the bond market and it becomes a part of your portfolio. It is, in effect, a loan. Like a bank, the bond owner is loaning money to the issuer of the bond. This money, however, needs to be paid back. Also like a loan, the issuer owes the bond owner interest. Interest is the fee charged for borrowed money. The interest rate, or coupon rate, is paid incrementally at a specified percentage. So when purchasing a bond, you’re loaning money to a corporation (private bonds) or your government (public bonds.) They pay you back after so many months or years, and you make interest (profit) on the exchange. It’s a very stable situation, but due to its stability, not as profitable as highly volatile stocks. But that’s okay—if you want a low-risk, conservative pillar to keep your portfolio diversified, bonds make an excellent option. Also—by purchasing your town’s municipal bonds, you support the community while turning a profit—pretty cool, right?

So how do you buy a bond? There are many available on the market today accessible via brokerages. Online brokerages are available on the Internet, which make it very easy to trade with little challenge. If you already play the market, however, you’re just a few clicks away. US treasury bonds are available directly from the government. The Bureau of Public Debt created TreasuryDirect.gov to provide citizens an easy and affordable way to bypass a broker and purchase treasury bonds directly. Also, many municipal bonds allow you to make profit tax-free, as the government constantly encourages people and entities to buy their securities.

So how much of your portfolio should be bond related? Well, because they are fairly low risk, low reward, you should own more and more as you get older and older. The shorter your time horizon becomes (for instance, distance between today and date of retirement,) the more bonds you should own. For a typical retirement account (IRA, Roth IRA, 401k, et al.) the percentage of bonds you should possess relative to your entire portfolio should parallel your age, it’s really as simple as that. For example, when you’re thirty, your retirement account should boast a 30% bond composition. When you’re closing in on that date, at around 60 years old, your portfolio should be composed of around 60% bonds. The older you get, the more conservative your portfolio should be, so altering the asset allocation to reflect this simple rule of thumb is a great way of keeping your money safe.

When investing in bonds, take notice of special and important dates. For instance, a bond’s maturity is the day on which all principal and interest should be fully paid back. On the bond’s maturity, you will stop profiting from the bond. Often, repayments and interest payments are made incrementally over time. If a bond has a “call date,” the issuer has the power to cancel repayments and buy back the bond at a fixed price, one that generally exceeds the original principal. In this, the issuer can stop the incremental interest rates from collecting by simply making a one-time repayment. Usually, callable bonds boast higher coupon rates because of this particular concession.

So whether you’re new at this or an avid investor, bonds are a great supplement to your portfolio and can make for some handy guaranteed income!

Filed under: How to Invest to Increase your Wealth

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