A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).
A solid asset allocation strategy often includes investments from a range of investment classes, the broadest of which include stocks, bonds, and cash. Investing in bonds can be an important element in your investment portfolio, helping to potentially:
- Reduce fluctuations in the your portfolio value
- Enhance investment income
- Prepare for future expenses
Investing in bonds can help achieve many different investment goals, including income generation, portfolio diversification even growth.
Enhance your Financial Portfolio
The bond market offers many choices, so it’s important to have a clear picture of your goals before you begin selecting individual bonds to invest in. A comprehensive financial plan helps you to Construct lifelong cash flow forecasts, showing all the money you will receive and all the money you will spend in your lifetime. The cashflows use prudent assumptions to protect against inflation and use realistic returns.
Traditional interest-bearing bonds pay interest on a regular basis, typically semi-annually, quarterly, or monthly. The payments on these bonds are fixed, which means the amount you receive with each payment generally remains the same.
Though bonds are often used for their ability to generate income, it is also possible for them to turn into growth investments. This happens when interest rates drop below the interest rate the bond is receiving, which makes it an appealing investment for other investors and allows the investor holding the bond to sell the bond at a premium.
Investing in fixed-income securities involves certain risks, such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed-income investments may be worth less than original cost upon redemption or maturity.