Friday, July 01, 2011

Who Should Buy Bonds?

Although bonds are an important part for any well balanced portfolio, they are especially advantageous to a certain kind of investors or in certain situations.

Retirees or Those Nearing Retirement Age

For these investors, the safety of their life’s savings is extremely important. Retirees have already crossed the age when they brought home a monthly paycheck to take care of their regular expenses. Now they are completely dependent on the returns from their investments to handle all their spending. In such a scenario, there is no question of taking big investing risks. Bonds allow these investors to get an assured monthly return and keep their initial investment safe.

Similarly, if you are about to retire, there is very little time left to recoup losses if you go wrong on a risky investment. You have to be as risk averse as retirees so that you don’t lose a part of your funds that you are relying on for a comfortable post retirement life. Your portfolio should have a high concentration of low risk, guaranteed return investments like bonds.

Creating a Fund for an Important Expense

A bond is also a good investment for those who are planning towards a specific, unavoidable expense. Education for your kids is one such expense that you can pay for by investing in bonds. It is not a good idea to take a lot of risk by parking a large proportion of your education fund in stocks. The term of the bond and the returns can be calculated precisely and this helps in planning the investment so that the right amount of funds are available at the right time.

For Protecting Investments During Volatile Market Conditions

Smart investors prefer bonds when the market is volatile with no clear indication of what the future will bring in stock prices. In such a situation, there is a high risk in investing in stocks because the market may move either way very quickly leaving you with no time to pull out without losses. Many investors learned this lesson the hard way during the stock market crash of 2008.
A bond comes with an assured return and a guaranteed payback on maturity. Bond prices may fluctuate through the volatile period but your investment amount and interest are relatively insulated. You can take advantage of this protection that bonds offer when the stock market is too volatile for your liking.
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