Things You Should Know About Investing In Bonds

It’s a scary time to be an investor. The volatility of the stock market often makes potential investors skittish, and an equally uncertain job market often compounds that uncertainty. But stocks aren’t the only option for people looking to invest their money and hopefully see it multiply over the years, and it doesn’t take a lot of money, even for someone concerned about his or her job, to begin laying the foundation for future wealth.

Investing in bonds is a generally safe way for people to begin building a portfolio. And with interest rates at a record-low 0.25 percent, the time is right for people to begin investing in bonds. Here are some tips for investors interested in bonds:

What are bonds?: Money Magazine once called bonds “fancy IOUs,” and that’s an appropriate term. Investors buy bonds from corporations and municipalities in order and eventually get back not only the money they spent but also interest.

Investing in bonds is a good idea during “bear” markets. Bonds provide a safe alternative to stocks during recessions. With the Great Recession showing no signs of abating anytime soon, and the stock market vulnerable to giant spikes in both directions, bonds once again look like a good choice for investors.

In addition, the lower the interest rate is, the higher bond prices rise, which makes bonds a doubly good investment during these unprecedented times. Yet bonds that are held until they mature are not impacted by the interest rates at the time of maturation: An investor receives the money he or she invested as well as the accompanying interest.

Bonds provide investors plenty of long- and short-term benefits. For retirees, the interest on bonds creates valuable income streams. And for those either planning for far-off events such as retirement or their children’s college education, bonds are an excellent way to begin building capital.

While bond prices make bond investing a solid, low-risk choice, investors should diversify their portfolio whenever possible. The safety of bonds will provide a foundation for a portfolio as well as a counterbalance for when the stocks negatively fluctuate.

However, bonds do not come without some possibility of risk. As noted earlier, bond prices will drop if and when interest rates begin rising again. It is important to take into consideration long term bonds yield more than short term to factor in protection for when rates rise and against inflation. On the other end of the spectrum, if interest rates are low, municipal and corporate bond issuers can call the bonds back and pay “par value.”