With new issues, all buyers pay the same price. On the secondary market, there can be a markup on corporate and municipal bonds. You may also be charged commissions, transaction fees and contract fees on your bond-related transactions.
When buying individual bonds, some investors want to manage their interest rate risk by spreading out the maturity dates for the bonds they hold. You could spend it all on a single bond with a year maturity date, but your capital would be tied up for a decade—plenty can change in markets in ten years. As each bond comes to maturity, you reinvest the principal in bonds with the longest term you chose at the outset—a 3-year maturity in this case.
If interest rates are higher, you gain the advantage of better yields. Plus, you can stagger coupon payments to improve cash flow. When thinking about how to buy bonds for your investment portfolio, individual bonds offer several challenges. In addition to the wide range of moving parts inherent in each bond, the primary market can be difficult to access for all but the wealthiest investors.
The secondary market has less transparent pricing than primary issues, which makes it difficult for investors to know the true cost of individual bonds and how much markup is built into the cost. Bond mutual funds offer investors many of the benefits of individual bonds, with decreased risk. Plus, buying mutual funds is a much simpler process. Like a stock mutual fund, bond mutual funds let you pool money with other investors to buy shares of a portfolio of bonds. Bond mutual funds may be actively or passively managed, funds typically follow a particular type of bond—corporate or municipal.
They tend to pursue a set maturity strategy, long term or short term. Bond mutual funds will come with management fees to compensate the fund managers for actively managing the bonds bought and sold within the fund. These minimums can differ between regular brokerage accounts and qualified accounts like IRAs.
You can invest in bonds by purchasing bond exchange traded funds ETFs. Like bond mutual funds, ETFs comprise baskets of bonds that follow a particular investment strategy. Bond ETFs may also be passively or actively managed. To get people to lend the money, the issuer must pay interest. Interest payments are represented by an interest rate on the coupon. Bonds are issued for a set number of years; at which time a bond is said to mature.
This means that high quality bonds bought when issued and held to maturity will return the full investment to the investor. Along the way, that investor would have received regular interest payments in addition to looking forward to getting back the original investment. Generally, bonds require diversification in much the same way as stocks. This points to the need for most investors to invest, not in individual bonds, but in bond mutual funds.
As is true for stock funds, if an investor purchases one share of a bond fund, the investor will get immediate diversification among the bonds of many companies. Most IRA and k plans also offer bond funds as investment options. New investors should understand another guideline. This is known as asset allocation and the most appropriate allocation for one person probably will be different than for another person.
To help determine an appropriate asset allocation, it can be helpful to talk with a trusted investment advisor or financial planner. That provides a combination of both investment options with a bias toward long-term growth. Sometimes people may decide to completely move away from stock and bond investments when they enter their retirement period.
Stocks, and to a lesser degree, bonds, can help mitigate the negative impact of inflation. Most people will be retired for two or more decades. During that timeframe inflation will continually erode purchasing power. This means, with historically average inflation of around three percent, after a little more than 20 years it will take twice as much money to support the same lifestyle as at the beginning of the retirement period. Groceries will cost twice as much.
Medications will cost more. Table of Contents Expand. Table of Contents. Reasons to Change. Alternative to Bonds by Age. Market Shift Actions. By Wes Moss. Wes Moss, CFP, is the chief investment strategist at Capital Investment Advisors and has been named one of America's top 1, financial advisors by Barron's every year since Learn about our editorial policies. Reviewed by Robert C. Learn about our Financial Review Board. Key Takeaways A common investing rule of thumb said that you should invest in stocks and bonds with the bond percent the same number as your age.
Today's longer lifespans, along with the chance of lower returns on bonds, mean that it's worth thinking about a slightly bolder strategy. Article Sources. Your Privacy Rights. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors.
Investing Retirement Planning. Part of. Retirement Planning Overview Retirement Accounts. Income Planning. Table of Contents Expand. Table of Contents. Ultra Aggressive. Moderately Aggressive.
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