Adding Bonds To Your Investment Portfolio

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Adding bonds to your investment portfolio may be a smart idea if you are looking for a way to invest that involves little risk and little gain but allows your portfolio to be balanced. Bonds offer an investment that usually reacts well to financial crises in the stock market.

Bonds are sort of like I.O.U. notes issued by the government or corporations to raise money for purchases that might be otherwise out of reach of the entity in question. People buy the bonds, which gives the organization an immediate cash flow, for the promise of a certain percentage of return every year and that the bond will be bought back at face value after a certain number of years.

The advantage to bonds is that they tend to be stable, at least when the government issues them. Businesses that issue bonds carry more of a risk, but generally speaking the risk can be mitigated by buying bonds from already established corporations. They also allow the investor a place to hold wealth when the stock market is working on correcting itself as it periodically does.

The best time to hold a lot of binds is when the stock market seems to be overvalued and highly priced. The stock market, like any other system needs to go through periodic corrections. These corrections tend to be dangerous for individual companies and individual investors even when they do not affect the long term outlook of stocks, and they occur when stock prices are high and the stock market overvalued. This is the time to be holding onto some stable bonds that provide a decent interest rate – better than most bank accounts. The estimate of the number of bonds in a portfolio when the stock market is overvalued is about 75 percent of a portfolio should be held in bonds.

As the stock market corrects, the bonds should be liquidated to take advantage of falling prices. When the stock market overcorrects and stocks become undervalued, that is the time to have about 25 percent in bonds and the rest in the stock market.

Of course, as with any investment, the ratio is going to depend on what is right for the investor. Some people would never carry bonds because they do not provide enough of a reward to justify even the small risk. They would prefer more risk with more reward. Others find stocks to be too risky, but bonds might work better for them than a low yield bank account of any kind.

Bonds are great for helping smooth out the bumps in the investing road. Because they have a low correlation with stocks, bonds tend to do better during financial crises. That means that a person who properly uses bonds will be able to withstand and recover from a system wide financial meltdown easier than someone who took the full brunt of the crisis and ma have lost most to all of his or her wealth.

Investors looking to get started with investing in bonds should find a financial advisor that they trust to give them the correct information about bonds and where to buy them. Because people can now have more flexibility in how they invest their money, it is important to know about all possible investments – not only to get the best returns, but to also be able to mitigate financial losses. It is this type of knowledge that becomes invaluable in any investor’s life. Those who learn how to thrive during the volatile episodes of the investment world will be sure to be the ones that profit in both bear and bull markets.

Via BusinessKnowledgeSource.com

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