Bond Investing Tips
Consider the following tips if bonds are part of your investment portfolio:
Determine your objectives before investing. Decide how much of your portfolio to invest in bonds.
Diversify your bond holdings among different bond types. Consider government, corporate, and municipal bonds, as well as different industries, credit ratings, and maturities.
Understand the risks that affect bonds. The most significant risk is interest rate risk. When interest rates rise, bond values fall, while values rise when interest rates decline. Other risks include default risk, or the possibility the issuer will redeem the bond before maturity; and inflation risk, or the possibility that inflation will outpace the bond’s return.
Choose bond maturity dates carefully. When you need your principal is a major factor, but the current interest rate environment may also affect your decision. Rather than investing in one maturity, you may want to stagger or ladder the maturity dates in your portfolio.
Follow interest rate trends. At a minimum, follow the prime rate, Treasury bill rates, and Treasury bond rates. Understand the significance of the yield curve and track its pattern over time. By monitoring current interest rate levels, you will be able to evaluate the appropriateness of an interest rate for a specific security.
Compare interest rates for specific bonds before investing. Interest rates can vary substantially among different bond types and among bonds with different maturities or credit ratings.
Research a bond before purchase. Review the credit quality, coupon rate, call provisions, and other significant factors. Determine whether the bond is appropriate for you in terms of risk, return, and maturity date.
Consider the tax aspects. By comparing the after-tax rate of return for various types of bonds, you may be able to increase your return. Depending on the bond, the interest income may be fully taxable or exempt from federal and/or state income taxes.
Review your bond holdings periodically. Evaluate the credit ratings of all your bonds at least annually to ensure the quality hasn’t deteriorated. Also, ensure your holdings are still consistent with your overall investment objectives and asset allocation plan.
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This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.