Bond Trading: Why Bonds are The Future of Investment
If you think of bonds as an old fashioned way to invest your money, you couldn’t be any more wrong. With the unpredictable economic cycles experienced today, bonds provide a safety net. They are reliable, predictable, and an important component of a well-balanced investment portfolio.
Here are four reasons why bonds make an excellent choice of investment for both individuals and institutions.
1. More Predictable Returns
While investment assets like stocks may carry higher returns especially in the long run, the returns are not predictable, especially in a recession. A bond is dependable and predictable, despite the current economic state.
The scheduled repayments make it suitable for investors who want money they can live off of. One of the best things about bonds is that they preserve the principal and when held to maturity, they terminate at par.
2. Great for Saving
Bonds are an excellent way to save for the future. If you do not need the money in the short term, you will get a better return investing in bonds than you would get from keeping the money in a savings account or certificate of deposit. This is because bonds have a higher interest rate than banks.
The best part is that the higher returns do not come with too much risk especially if you invest in investment-grade bonds. These bonds provide you the opportunity to re-invest the cash-flow if you desire.
3. Provides Diversification
The phrase ‘you should not put all your eggs in one basket’ is rich wisdom when it comes to investments. Great diversification in a portfolio provides better risk-adjusted returns to an investor.
Bonds make an excellent diversification tool for any investor’s portfolio. They have a low correlation to other asset classes like stocks, and this makes them excellent at shielding investors from the volatility of the market. This reduces risk and maximizes returns.
4. They Carry Tax Advantages
Tax reduces the income earned from investment. It is mandatory for most investment assets such as money market funds and equities, except in cases where the money is held in a tax-deferred account.
If you are seeking to reduce your tax burden, there are some bonds that can come in handy. Municipal bonds are tax-free at the federal level. And if you have a municipal bond issued by the state you reside, the bond is tax-free at the state level. Income from the U.S. treasuries is also tax-free at the state and local levels.
Whether you are looking to save some money for the long-run or are looking for a reliable way to generate cash flows or meet future obligations, bonds can serve the purpose. They have less volatility than other types of investments, and the best part is that you could reduce your tax obligation and get your capital investment back at par.
Bonds will always provide a great way to diversify your portfolio. When the stock market is falling, like it happened in the 2001-2002 crash and the 2008-2009 financial crisis, having bonds in your portfolio will ensure you get better risk-adjusted returns.