Bonds are a type of investment that act a lot like an IOU. When a government or corporation wants to raise a large sum of money, one way they can do it is to sell bonds to the public, paying investors interest on the bond for an agreed upon period of time. When that time period concludes, the bond is said to “mature,” and the borrower repays the original amount, or face value.
In this low interest-rate environment bonds are no longer a significant income generator, but they can afford significant benefits to investors. Here are three reasons to consider including bonds in your investment strategy:
1- They can provide stability
Unlike the stock market which experiences frequent volatility based on a variety of factors, bonds are really loans with specific terms of interest and repayment that if held to maturity don’t present many surprises. We saw this play out in the last quarter of 2018. One of the worst on record for stocks, bonds held remarkably steady, providing investors not only with investment diversity but a way of mitigating overall portfolio volatility when the stock market experienced dramatic losses.
2- They are a source of ready capital
A drop in the price of equity shares can mean investors have the chance to purchase those shares at a cheaper price, positioning them for a greater return on investment when prices go up. Bonds can be liquidated to free up the funds needed to make an opportunistically timed purchase of additional equity shares.
3- They can serve as a buffer during market downturns
While not always a material source of income in a low interest-rate environment, what income is generated is typically steady. For this reason, bonds may be able to help investors in need of cash to weather market fluctuations, providing the opportunity for a cushion from not having to sell equities at a loss.
Bonds may not be the most exciting part of your portfolio—but that’s exactly why they can be so beneficial for investors. Contact me to talk about the role bonds can play in your unique investment strategy.