Bond is something a lot of people when thinking of investing think of. It’s one of the many things that people invest their money into but not all of them understand just what bond is. Let’s find out what a bond is and whether you should be investing in bonds in 2022.
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What’s a bond?
A bond is basically a loan that you let a company or the government borrow. They’ll pay you interest and return your money when the bond is expired.
A city that wants to build a library but does not have enough funds may issue bonds to individual investors. With enough money, the library can begin to be built. You can buy multiple bonds from the same source.
Some people like to buy bonds instead of stocks because it seems less risky, you get paid fixed installment that is predetermined and you can avoid the ups and downs of the stock market and the stress that comes with it.
People may also purchase bonds in their portfolios to make sure that when and if the stock market crashes, it buffers some of the effects.
The average yearly return of bonds is 5% compared to that of stocks at 10%.
There are some risks associated with bonds however, for instance, if the organization or government you lend the money to isn’t credible, they can’t pay you, you may never see your money again.
Types of bonds
There are different types of bonds. Bonds that is with higher risk pay more than bonds that is with lower risk.
Treasury bonds
Treasury bonds are backed by the federal government. Treasury bonds is one of the safest types of investment out there for investors as they are backed by the federal government. The risk of bonds is the credibility of the organization you’re lending money to and the federal government surely scores high on the credibility section. You can be sure that you’ll make the installment payments on time and they’ll return your money when the bond is expired.
However, treasury bonds typically have a low-interest rate so you will not get paid as much. Bills, notes, bonds are several different types of treasury bonds that differ based on the length of time until the bond reaches maturity.
Corporate bonds
Corporate bonds are created by companies that want to raise money. Bonds aren’t just associated with the government. It can also be issued by individual companies.
You can choose between high-yield or investment-grade corporate bonds. High-yield corporate bonds pay out more, they have a higher interest rate but the risk is also greater. If they can’t pay you back because they failed their project, you may not see your money again. Investment-grade corporate bonds have a higher credit rating meaning that they are less likely to default and not pay you your installment or return your money but the interest rate would also be lower.
Municipal bonds
Another word for municipal bonds is munis. Municipal bonds are issued by states, cities, countries, and other non-federal government entities. Municipal bonds may be issued to pay for city projects. These city projects could be a brand new school or a new highway.
The good thing about municipal bonds is that those with municipal bonds may not have to pay federal taxes on the interest they make from owning the municipal bonds.
Municipal bonds typically are short-term between one to three years. A typical long-term bond is around ten years.
Pros of owning bonds
There are many good reasons to own a bond. This is however should be a personal choice. I’m not a financial advisor so please do your own research.
Bonds are quite a safe form of investment. Bonds aren’t without risks. Its risks pertain to the credibility of the people you’re lending your money to. Bonds compared to other forms of investments are lower risk. There are many people out there who put most of their investment in stocks and leave some for bonds to offload some risks. Bonds are less risky than stocks overall but of course, the return is also lower.
Bonds are a form of fixed income. Bonds offer regular payment that predictable amount. Those who are retired may like the idea of receiving regular payments from bonds just like they would when they weren’t retired.
Cons of owning bonds
Are there any cons of owning bonds? There certainly are.
Bonds have low-interest rates. This means that you won’t get paid as much as you could have if you invest your money elsewhere. For instance, stocks have an average annual return of 10% while bonds have an average annual return of 5% sometimes even lower.
Bonds aren’t without risks. People may choose to invest in bonds because it’s low risk but it still does carry with it some risks. There’s a chance that you won’t be able to sell the bond or that your bond issuer can’t pay you the predetermined interest or principal they owe you. They could default meaning you won’t see your money again. Another thing is that inflation also eats away your purchasing power. You may agree to be paid $100 per month from a specific bond you bought ten years ago but that $100 isn’t worth as much as it used to now.
Are bonds a good investment in 2022?
Bonds can be a great addition to your portfolio. Typically, an investor will pool his or her money into other types of investments other than bonds as it may offer a greater return.
An example is Amy who puts most of her money in stocks. She has some riskier stocks from companies that aren’t as well known and she has more safe stocks from Index funds for example but still, she wants to diversify her portfolio so she invests in bonds where it is safer although the annual return may be lower.
With stocks even though the average annual return is higher than bonds, you have to ride out the ups and downs. If you aren’t the type of person that likes to take risks and doesn’t have the time to wait out the downs of stocks bonds may be a better idea than stocks.
You have to do your own research to determine whether you should invest in bonds or not and which bond to invest in.
When you’re younger, you can afford more risks so putting a higher percentage of your money in stocks rather than bonds could be a good idea. The figure is 10%. Experts recommend that 10% of your portfolio should be in bonds if you’re in your early 20s. The same experts may say that 40% to 50% of your portfolio should be in bonds if you are at the age of 65.
You may also consider the fact that certain bonds such as municipal bonds offer potential tax breaks. It means that you may not be required to pay taxes on the interest earned on those municipal bonds. If this appeals to you then bonds could be something you should look into.
You should again think about the risks that bonds carry. What if the borrower goes bankrupt before they are able to repay you? These are the things you need to think about to come to your own conclusion about whether to invest in bonds.
Can I resell my bonds?
Yes, you certainly can resell your bonds before it expires. Some bonds take 10 years to expire so many people who don’t want their funds to be locked up in bonds may decide to sell before the 10 years is up.
You do have to pay attention to when you sell your bonds. For instance, if you sell your bonds when the interest rate is lower than when you bought them, you may turn a profit. If you sell your bond and the interest rate is higher than when you bought it, you make incur a loss.
