First, think about what your short term and long term goals are before deciding to invest in bonds. For the most part, Diversification is a key to hold loss , it is never a good idea to put all your assets into any one investment instrument. . If you do decide to include some bonds in your portfolio, be sure to include several bonds, each with different characteristics, i.e., Government bonds, municipal bonds, or corporate bonds, to name a few. This puts your capital at lower risk for any one issuer that might not be able to pay interest and principal. Additionally, also pick bonds with different maturity dates in order to manage interest rate risk, such as one, three, five and ten year maturities. Then, too, if you are invested in the stock market and the market falls, owning bonds may assist in easing the pain of some of your losses.
Most often, it is recommended that bonds be bought and held until their maturity date to realize the greatest profit. Additionally, you will usually be paid interest on your investment twice a year. Don’t choose a bond that is “callable”. Usually these bonds are called “early”, before maturity, when interest rates are likely going down. The principal that you receive then will be lower and you are forced to invest the principal returned at lower rates than you will like. If you are interested in getting the most interest income possible from your bond investments, purchase longer term bonds. Despite the fact that the longer term bond is riskier, based on changes in interest rates, this will not affect your purchase, if you are a buy and hold investor. Should you decide to change your position and sell your bonds early, you will lose money.
High yield bonds, otherwise known as Junk Bonds, are risky. If you decide to buy a high yield bond, be sure to include several different issuers to lower your risk of not being paid your interest or even your principal. The risk with high yield bonds intensifies when there is an economic crisis, and therefore possibility of default is more likely.
Anticipate your future goals and needs
If you know you’re going to have a child going off to college in fifteen years of so, purchasing bonds and holding them to maturity assure you that the money will be there when you need it. Owning a portfolio of both stocks and bonds provides a more stable vehicle for future goals, since the stock market and the bond market often go in differing directions, not always, but notoriously, they do. It is important, though to have just the right mix of stocks and bonds. It might be a good idea to discuss asset allocation with a financial professional. Those individuals looking for the best total return on their investments, don’t buy and hold, but buy low and sell high.