Investing In Bonds

What is most important about investing in bonds is how it interacts with you as an investor. If you're not sure what a bond is, first check out definition of bonds. Basically, you get regular payments based upon how much you originally invested and the value of your bond can change - even though at the end of the term of the bond you get your initial investment back. There's an open market for bonds - just like stocks - that allows for changes in bond value.

Changes in bond value happen because of many factors. First and foremost, inflation rates have a huge impact on the general bond market. Also, if people think that the company that issued the bond could go out of business or not make interest payments, then the value of the bond will go down. The current direction of stocks also affects the overall price of bonds because when stocks fall, people sell out and buy the safer bonds (when they should really do the opposite).

The US government issues the safest bonds because, barring revolution, they will not go out of business. Therefore, it will always make their payments on time - even if the US government has to borrow more money. However, their interest rates are lower than corporations. Corporate bonds are still safer than stocks. Again, you must take on a greater risk for greater potential gains.

Some bonds are state and/or federal tax-free. These usually come in the form of "municipal" bonds from state or local governments. They have a lower return than regular bonds, but if you're in a high tax bracket, it may be worth it to get them over the taxable bonds.

How should you go about investing in bonds?

I like to take the same easy-as-pie approach to investing in bonds that I do with stocks - index funds. With bond funds investing you don't need to worry about whether or not a company will be capable of paying its bond interest payments in the near future. You can also be secure in the thought that its not possible for all businesses to lose their interest paying capabilities at once.

Why should you consider investing in bonds?

The most important aspect of bonds is that they don't usually move with the stock market. In other words, when stocks go up, bonds don't always go up. And when stocks go down, stocks don't always go down. This presents a great opportunity for any investor.

Lets say over a years time, bonds go up 10% while stocks go down 20%. If you own both stocks and bonds, you can sell some of your bonds high and buy some stocks low. Likewise, lets say over a years time stocks go up 20% and bonds go down 10%. You can then sell some of your stocks high and buy some bonds low. You're now practicing "buy low, sell high" with two different asset classes simultaneously.

Bonds are a major part of what I consider to be the best way to invest money.

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