Why Bonds Are Still a Viable Option for Investors

Over the course of 2017, advances in the stock market occupied almost all of the world’s financial reporting. Major indices broke records month after month, while bullish sentiments on individual stocks produced gains not seen in years.

Amid this stock-inspired frenzy, though, bonds received relatively little attention. Despite this, all investors should be aware that bonds are still extremely viable securities. Here’s what you should know about bonds and their role in your investment portfolio.

What Are Bonds and How Do They Work?

In basic terms, bonds are debt instruments issued by governments or businesses in order to borrow against the future creation of value. The beginning of a bond investment, therefore, begins with the lending of a principal sum to the bond’s issuing body.

Bonds have a set maturation date, at which time the issuer must pay off the principal. Though this maturation time varies based on the type of bond, it is usually between five and 30 years.

The real value of a bond investment, however, occurs between the time a bond is purchased and the time it matures.

At set points during this time, the bond issuer will pay what is known as a coupon, which is an interest payment based on a certain percentage of the bond’s principal. These coupon payments account for the profit that investors can make from bonds.

Benefits of Investing in Bonds

Bonds tend to produce lower returns than stocks, but they are also lower in risk. As such, these instruments can be used to build up a low-risk portion of an overall investment portfolio.

Since they produce predictable cash flow, bonds are especially good investments for older investors, including retirees, who may need recurring cash from their portfolios.

Finally, bonds are beneficial for long-term savings. Since they guarantee principal repayment and a regular coupon that is greater than the very low interest paid by modern savings accounts, bonds can be reliable instruments for storing money that you won’t need for a very long time and letting it generate some interest in the meantime.

Best Bonds to Buy for Growth

The best bonds to buy will depend largely on your portfolio goals. For stability, US treasury bonds are usually the best.

If you’re okay with a bit more risk and higher rates of return, bonds issued by faster-growing emerging market economies may be better for you. Corporate bonds are also good investments but do carry with them the risk that a given business could become defunct or bankrupt.

Where to Buy Bonds

There are many different ways to buy bonds. Many national governments, including the United States, sell bonds directly through their treasury departments. For investors who want to purchase multiple types of bonds in one place, though, bond brokerages offer a very high level of convenience.

Generally, a bond broker will be your best bet, unless you intend to buy only one type of bond.

It’s also worth noting that you don’t have to buy bonds directly from their issuing body. A secondary market exists in which bondholders can sell off their bonds to other holders.

Secondary market sales can be good for picking up bonds, but remember that you’ll have less time until the final maturity date to collect coupon payments.