Bonds are most often used by people looking for a fixed rate of return and an element of safety. That’s not to say that bonds don’t have risk, they do. However, those tied to governmental instruments (U.S. Treasury issued) lend a bit more stability than investing in bonds from private companies.
When you hear the word bond, it might remind you of a gift given to you by a family member, as in a U.S. Savings Bond. In this case, you would hold it for a certain maturity period at which time you are paid the value it was upon purchase plus any earned interest. Think of it as the issuer borrowing money from the buyer and giving back an IOU in return. Interest earned is also free from state and local taxes.
The Benefits of Investing in Bonds
#1: As interest rates rise, bond values decline.
#2: Offer fixed rates of return.
#3: Provide safety in volatile stock market.
Unlike government-issued bonds, corporate and municipal bonds are highly influenced and affected by the financial health of the issuer. Corporations go bankrupt. Cities and states default on muni bonds. That’s the worst that can happen for holders of these bonds.
Municipal bonds are used to fund public projects, such as the construction of schools, hospitals, highways, sewers, and universities. While debt backed by a city obligation pledge rarely defaults, those generated by individual projects such as housing or health care facilities carry more uncertainty. Of course, should a city go bankrupt, such as Detroit recently did, bonds become worthless.
Corporate bonds are fully taxable and issued by corporations that fund capital improvements, expansions, debt refinancing or acquisitions that require more capital than would ordinarily be available from a single lender. Risk here involves a corporate transaction that increases debt burden, natural disaster or regulatory change that can trigger a downgrade.
High-yield bonds sound enticing because they can reward investors handsomely, but risk is very high because they are a lower quality bond. All bonds carry ratings given to them by credit rating agencies. AAA is the best quality. Anything under A should be considered high risk.
Another way to buy bonds is through bond funds. It’s a good way to give your portfolio exposure to bonds but with diversification among dozens or even hundreds. The downside with bond funds is that losses sustained can be permanent because managers don’t hold them to maturity.
It’s generally a good idea to have a mix of stocks and bonds in a portfolio to offset market volatility.
Yesterday afternoon Apple released its third quarter earnings report. If you were hoping for earth shattering news that would move the stock dramatically you’ll be disappointed. Though it was the previous Apple earnings report that sent the stock higher by 8% and ignited a 26% rally, I wouldn’t expect such a move from the stock today. [...]
Elon Musk has made some bold bets. Though he is only 43, Musk has already created the market for digital-payments, taken on the entire auto industry, is attempting to reshape the global energy portfolio and wants to venture into space where no one has ever before ventured. When you consider his businesses and his ideas as [...]
The S&P 500 just hit another all-time high. As a result, the questions have been rolling in here at Wyatt Investment Research. The question on everyone’s mind . . . what is the best way to protect my investment returns? For most individual investors, buying put options is the answer. Unfortunately, this strategy is one of the [...]
Believe it or not, low volatility stocks tend to outperform the market. Investing in low volatility names with steady dividends could well be a better strategy than trying to time the market. The S&P 500 Low Volatility ETF is up 9.3% year to date, compared to the S&P 500, which is only up 6.8%. Throw [...]
Last month, SolarCity (NASDAQ: SCTY) agreed to acquire solar-panel manufacturer Silevo for $200 million. The acquisition may be the best thing to happen to SolarCity since the company completed its IPO in late 2012. SolarCity was a Wall Street darling for the first 15 months after it went public in December 2012, rising more than [...]