Consider Investing in Bonds Rather than Bank Deposits

August 21, 2012 No Comments »

investing in bondsThe U.S. financial market has taken a beating over the past several years prompting many investors to shift their funds to more conservative investment strategies to weather the storm.

In the beginning of 2009 when CD rates were nose-diving from record highs, we mentioned our favorite alternative to CD’s for income investors, however, if we had to chose a favorite today – bonds would be at the top.

For fixed income investors, bonds have been an attractive option. That’s because when interest rates fall, bond values rise. However, selecting the right bond is important to position yourself for future investment gains.

Stick with Funds

Bonds and mutual fund bonds are different. With a bond, you’ll always get your interest and principal at maturity. With a bond fund, however, your return is uncertain and there’s more potential for both financial gains and losses.

If you don’t have over $250,000 to invest, stick with funds. Individual bonds are expensive, and you have to purchase bonds of at least $50,000 to keep the commission from eating away at your investment dollars. Also, some bonds don’t have much liquidity, which makes them expensive thus difficult to sell.

The exception, however, is Treasuries, which you can purchase directly (through an online broker or investment bank) from the government without incurring fees with only $100.

Investment Grade Corporate Bonds

Even though interest rates are low, some corporate bonds offer generous yields. Experts believe corporate bonds will benefit as U.S. corporations recover from poor economic conditions. Don’t, however, go with long-term corporate bonds. They carry a higher interest rate risk. Focus only on intermediates.

Municipal Bonds

Municipal bonds are known for being a stable investment, during economic turbulence. This type of bond is free of federal and state taxes, if you live in the state where the bond is being issued. This type of bond is most appealing if you’re in a high tax bracket.

Although several cities have declared bankruptcy over the past couple years, experts say this risk is manageable. Experts don’t anticipate another large wave of city bankruptcies in the near future.

Foreign Bonds

Some foreign markets are offering attractive bond investments. In some cases, yields are higher than U.S. options. Some investors are focusing on emerging markets, including China and Brazil. However, be careful about investing in areas that are struggling, which includes Eurozone bonds. And consider favoring shorter term investments so that your money is available when more lucrative options open up as the economy improves.

Related: Are foreign currency bank deposits a good investment strategy for income investors?

In this rate environment, diversity is key in stabilizing your investments. Invest in a variety of sectors, rather than pouring your money into just one. A diverse portfolio offers more stability and flexibility in the future.

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