It’s a common misconception that bonds are only for very old, very rich or very conservative investors or very young (savings bonds for kids). In fact, bonds are an important component of a strategically-balanced portfolio at every stage of any investor’s life. Bonds can:
- provide investment stability to help buffer against the volatility of the stock market
- pay a steady stream of income, sometimes tax-free income, which can help with living expenses
- provide high rates of return to grow your capital
- play different roles at different points in your life to help you achieve your financial goals
The key to a well-balanced portfolio is asset allocation and diversification. Asset allocation is spreading your money across a good mix of equity investments (stocks), debt investments (bonds) and cash instruments to maximize the return of the entire portfolio. Diversification is investing in various vehicles across asset classes to reduce the risk that any one investment may pose to your overall portfolio.
Unfortunately there is no hard and fast rule, or formula, about how much to invest and where to invest. Your investment strategy will change over time, reflecting your investment horizon (how much time there is between now and when you want to access the money you are investing) and your risk tolerance (how much risk you are willing to take in exchange for a possible higher rate of return.)
So whether you are just starting out in your career or you are already enjoying retirement, or if you are somewhere in between, bonds should be a part of your investment portfolio. Let’s look at the role bonds can play at each stage of your life.