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What Are the Best Tips for Investing in Bonds?

Before individuals begin investing in bonds, they should be familiar with bond ratings.
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  • Written By: Felicia Dye
  • Edited By: Melissa Wiley
  • Last Modified Date: 27 November 2014
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One of the most important tips for investing in bonds is to understand how they work and the role that they can play in a person’s portfolio. Investors should carefully consider the portion of their portfolios that consists of bonds. Before making any selections, it is usually good practice to assess the bond rating to determine the amount of risk involved. Although bonds tend to be investments that are sought for security, it may be worthwhile to consider some of the riskier options.

Before investing in bonds, a person should understand how these securities operate. Bonds are essentially loans made by the investor to an entity in need. In return for the loan, the borrower pays the investor, who periodically receives interest on the amount invested. When the bond reaches maturity, the investors are also repaid the principal, which is the amount that was originally invested.

When investing in bonds, a person also needs to be aware that there are several types. Government bonds tend to be considered the safest if they are issued by a stable and creditworthy nation. Municipal bonds are also issued by governments, but at lower levels, such as state and county governments. These are also considered low-risk investments if the municipality exists within a stable nation. Then there is the option of corporate bonds, issued by private businesses, which tend to have more risk but higher earning potential.

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Investors should also understand why they are putting money into bonds. Generally, bonds are recommended for their stability and endurance. Since these investment vehicles are considered low risk in comparison to many others, people can usually depend on retaining their principal investments and receiving some degree of return.

It is important for investors to have diversified portfolios and highly recommended that bonds should be part of the mixture. It is also important, however, for investors to avoid being careless about the portion of their portfolios that consist of bonds. People are normally warned against investing in bonds solely. Instead, investment specialists tend to recommend portfolios that consist of about 20 percent bonds for high-risk investors and 40 percent for most others.

Before individuals begin investing in bonds, they should be familiar with bond ratings. Doing so helps to determine which options are best. When an entity has an AAA rating, this means that it has the lowest possible level of risk for defaulting on its ability to repay the investor’s principal. Risk is considered relatively low as long as the rating is not below BBB. Investing in bonds that have low ratings may be worthy of consideration for some investors because these bonds tend to offer higher returns.

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