MPower: Is Now The Time To Invest In Bonds?
With the Fed hiking interest rates, investors are turning to bonds as a way to not only play it safe with their holdings, but also increase their income. This is an idea we have spent a lot of time on over the past few months. However, we haven’t spent much time on one of the most tried and true approaches, investing in fixed-income securities. More specifically, bonds, both corporate and treasuries.
But first, a brief rundown of what bonds are…
A bond is a fixed-income instrument that represents a loan made by an investor to a borrower. You can think of it as an IOU between the lender (you) and borrower (corporation or government trying to raise money). In short, the borrower is asking to borrow money from you, with a promise to eventually pay you back at a later date. To sweeten the deal, they’ll also pay you interest on a regular basis. When you buy a bond, you have lent the entity your money.
But back to why I’m talking about bonds today.
When interest rates rise (like they are currently), the yields on bonds also rise. So I’m not surprised to see a push into bonds. I’m hearing about it in the industry and media, as well as from colleagues and friends of mine. Many of them are testing the fixed-income waters, looking to receive those bond payments and hopefully take some of the bite out of inflation.
However, if you haven’t spent much time researching bonds or other fixed-income securities, fret not. Today, we will look at a few options and see how they stack up against each other.
The most obvious reason to buy bonds is usually centered around risk aversion and income. Aside from finding which security has the highest yield, there are a couple of factors that investors should consider.
As we mentioned, risk is one of the most important things to be aware of, but it can be difficult to quantify that risk. Luckily, we have some help.
Comparing the securities, we would automatically rule out the riskiest asset in the bunch. If the goal is risk aversion, why put yourself behind the eight ball? Moreover, we can see there are types of bonds that not only provide the yield we are after, but can also return a pretty decent return as well.
Fees are another data point we want to be aware of as these can add up over time. However, this is the price we pay to have professionals actively manage these funds.
If you’ve been thinking about adding bonds to your portfolio, now might be the time. As inflation rises, so too must our income. Bond investing is a great way to accomplish this.