Tuesday, November 1, 2011

Investing in Bonds

Investing in bonds- A bond is basically a loan you give a financial institution in exchange for interest. A financial institution will take your money for a bond, and at maturity of the bond is obligated to pay you the borrowed money along with the interest accrued on the bond.
You will want to start your investing in your 20’s and 30’s. Although it is hard to imagine needing money for retirement this early, your best chance for a carefree retirement is to start saving now. I know everyone has different things they are saving for be it for a family, house, cars, or travel, keep in mind you will need money later in life. This stage is the best stage in life to maximize your capital. You can invest for longer periods of time (30-40 years).
Your ability to reach your goals and achieve financial security, however, depends in part on maximizing your current income through investments. You now have the opportunity to create the important habits of saving and strategically investing now so you can enjoy its benefits when you grow old.
Since you have a longer time frame investing, before you will need to access your money, you are in a better position to consider investing in higher-yield, higher-risk instruments. There are higher-risk bonds that carry high coupons (interest rates). Keep in mind, however, that while your higher-yield investments can appear more exciting (because of their potential to earn more interest), it’s important to round out your portfolio with some strategically chosen lower- and medium-risk investments as well, including bonds.
When you are in your 40’s and 50’s you can still invest for long periods of time (20-30 years), however your risk tolerance is slightly different now. You will want to choose less risky investments, low and medium. If you didn’t or couldn’t invest earlier in life you need to begin making up for lost time. You are probably living a little more comfortably than when you were younger, so you may have more money for investing. However since your investment horizon is somewhat shorter now, you will want to rebalance your portfolio to make sure that you have allocated your assets appropriately. It’s usually recommended by financial advisers that at this point in your investment life it would be prudent to shift your investments to focus more on medium-risk and low-risk instruments, while still maintaining a smaller percentage of investments in higher-risk instruments. Remember that the key is spreading, or allocating, your assets across investments of varying degrees of risk to blend the risk you’re taking and to maximize your interest-earning potential. Be sure to consult a financial advisor for investment recommendations.
Hopefully by the time you reach retirement you have appropriately invested and can have a comfortable healthy retirement.