Bond Investing - What You Dont Know Makes The Difference
Its a little known fact that investing in bonds offers almost as many investing options as in stocks. Bonds are a key element of the diversified portfolio, so its important to remember to take time to compare stocks vs bonds. Not to choose one over the other, but to decide how to split up your hard earned money between these two smart investment choices.
There are low yield bonds, frequently issued by government entities, that prepare oneself a small but steady returns for very little risk. There are also higher risk, and thus potentially higher yield, “junk bonds” which are issued by financially shaky institutions, generally companies struggling to raise funds. All of these bonds are effective 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.
Some of the larger mutual funds own a mix of stocks and bonds, while others 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.
Its important to understand bond investing. Most people jump right into stocks, risking 100% of their portfolio. Mixing in bonds with stocks is a smart move.
Getting a clear view of financial markets can be a challenge in itself. Bond 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.
Tags: Stocks and Bonds