A solid asset allocation strategy often includes securities 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 your portfolio value
- Enhance investment income
- Prepare for future expenses
Investing in bonds through index funds can help achieve many different investment goals, including income generation, portfolio diversification, and even growth.
No, not these Bonds
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The bond market offers many choices, so it is important to have a clear picture of your goals before you begin selecting what class of bonds to invest in. Short-term verses long-term; Investment grade verse high yield; Corporate verses government, Callable verses non-callable, are but a few factors to consider when allocating to this class of assets. Once this is accomplished, a comprehensive financial plan helps you construct a lifelong cash flow forecast, showing all the money you will receive and all the money you will spend in your lifetime. The cash flow chart uses prudent assumptions to protect against inflation while keeping return forecasts realistic.
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 choice for other investors, and offers the holder of the bond the option of selling at a premium.
Investing in fixed-income securities involves certain risks, such as interest rate 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, including treasuries, may be worth more or less than the original cost with early redemption.