If you’re considering investing in bonds or bond funds, it’s essential to do it right. Keep reading to learn more about savvy bond investing, and here’s a good bond fund to consider, as well.
It’s Not All About Yield
One of the biggest blunders bond investors make is obsessing about yield. This often happens if interest rates bottom out or went down recently. It’s also common when investors think they are getting the ROI they want.
Experts advise that you avoid being tempted by high yields offered by bonds with lower credit ratings. Also, don’t focus too much on gains from the previous quarter.
Yield is one of several factors you should analyze before buying bonds, but remember: Higher yield potential means more risk.
Determine Your Objectives
Do you want to have enough cash for your daughter’s college education? Is your goal to live well when you stop working? If so, how lavishly do you want to live? You may have several financial goals, so name them and be as specific as possible. You’ll never arrive where you want if you don’t map out where you’re going.
Assess Your Comfort With Risk
Different bond funds and bonds have different risk levels. You always need to know the risks before you put your money on the line. It’s smart to write down your risk comfort level as precisely as possible, so you have it all laid out and clear.
Complete Your Homework
If you’ve made it this far, you’ve got a good start. Now you need to keep going! Read articles and books about smart bond investing. Research information online about investing in bonds, and check out what your library has on the subject, too.
Follow fixed-income stories in the financial news online and in your local paper. Learn about bond math, and read the offering statement for the particular bond. This is where you’ll learn vital information about the bond, such as the call schedule and yield.
Find A Broker Specializing in Bonds
Talk to several brokers and find one that you like. Be sure the broker is familiar with your risk tolerance and financial objectives.
Read The Bond Fund Prospectus
If you want to buy a bond fund, the prospectus is where you’ll find the critical information you need to make an investment decision. Read closely about the bonds that are in that fund.
For example, not every bond in government bond funds is issued by governments. And pay close attention to the fees.
Individual bonds also come with prospectuses, which get information from the indenture for the bond. That’s a legal document that details the agreement between the bond seller and buyer.
Understand The Costs
When you start investing in bonds, it’s critical to know every cost involved in buying or selling them. Ask your broker or financial advisor how they are getting paid, including mark-ups, mark-downs, and commissions.
Plan On Reinvesting
Reinvesting your coupons uses the power of compounding to work for you. It’s smart to set up a coupon account before you begin receiving coupons. That way, you have a place to stash the money and aren’t tempted to use it. Of course, if you buy a bond fund, this is done for you.
Don’t Time The Market
Speculating on interest rates is risky. Decisions may be made on where interest rates were, not where they’re heading. A better idea is to adhere to the investment strategy to get you where you want to go financially.
With this information, hopefully, you’re now on track for successful bond investing!