Buying bonds seems complicated for beginner investors. It took me a while to wrap my head around the ins and outs of bonds but with the right amount of research you can definitely understand them. Anyone can invest in bonds it doesn’t matter who you are either. Broke college student to a rich business man you can invest in bonds.
Many financial advisors will suggest including bonds as part of your investment portfolio. This is because bonds have lower volatility and thanks to their lower risk, they can help lower the chances of losing money.
Now let’s get started with a simple question!
Where To Start When Buying Bonds
The process might seem a bit tricky when buying bonds for the first time. This is because a lot more is involved at the initial stages compared to other types of investments such as stocks.But don’t worry because the Wealthbuilderz is here to show you how simple the process can actually be.
There are three different way to purchase bonds
1. Buying bonds directly from the US government
You can access the treasury direct website, and through the federal government’s program, purchase your bonds. This cuts out any broker or any middleman.
Simply open an account, log in then proceed to buy your bonds.
Learn more here.
2. Buying bonds via a broker
A second way to buy bonds is through a broker. You will open an account with the broker and proceed to buy the bonds. Keep in mind that you will be purchasing from other investors looking to sell their bonds.
3. Buying bonds via an
Exchange Traded Fund (ETF)
An ETF lets you diversify your investment portfolio by purchasing bonds from many different companies. The bonds can be short-term, medium-term, and long-term.
One of the main benefits of buying bonds via an ETF is you can buy in short increments.
Things To Consider When Buying Bonds
Not all bonds are the same. Some offer more risk than others do, so here comes the question – How do you make the right choice when investing in bonds?
Here are a few things to watch out for:
- Can the issuer pay the bonds?
It is paramount that the bond issuer, whether a company, government, or municipal can pay the bonds and the interest. After all, if the borrower is at a high risk of default, there is no reason why smart investors should buy their bonds.With a bit of investigation, you can find out the credit worthiness of the bond issuer.
The best and easiest way to do this is to access the websites of independent agencies that rate bonds. Some of the most reliable agencies include Standard & Poor, Moody’s, and FitchRating.The most credit-worthy issuers and bonds are given the highest rating—AAA. This rating goes down from here. The higher the rating the more creditworthy the issuer and the lower the interest rate.
- Choosing corporate bonds
The best way to rate a company’s bonds is to consider the income of the company and then compare this with how much the company is willing to pay in interest. If the company is not doing well financially, it is more likely to eventually default. You can access this information from the most recent income statement where you will compare the annual operating income and interest expense.
You can find the income statement either on the company website or the EDGAR Database.Keep in mind that the operating income is not the net income. The latter factors out interest expenses.
2. Choosing government bonds
It is a bit harder to evaluate government bonds and perform a risk assessment as you would with corporate bonds. This is because governments don’t have huge revenues that would give you an impression of their stability.
That said, US treasury bonds are considered to have the lowest level of default. They are so reliable that they are deemed risk-free bonds.
3. How to choose municipal bonds
The second best option as far as the creditworthiness of the bond issuers goes is the municipal bonds. One way to evaluate municipal bonds is on theElectronic Municipal Market Access site EMMA. Here you can find the credit rating.
You can also see if there have been recent defaults with previously issued bonds and get a feel of the government’s ability to pay both interest and principle.
When is the right time to buy bonds?
A major question you should ask yourself when buying bonds is whether this is the right time. When a bond issuer issues bonds to investors, they have already set the prices and the interest rates.However, this is not where things end. The prevailing interest rates will have an effect on the bond prices as well.
During economic boom times, the prevailing interest rates rise which in turn pushes down the bond prices. However, when the economy begins to slow down, interest rates go down which then pushes up the bond prices. It is simple for any investor with this information to try and predict the best time to buy bonds which is when the prevailing interest rates are high.
However, trying to predict the market is not a good way to invest in bonds. Instead, it is much better to buy multiple bonds that mature across several years. This helps to diversify the risks in the interest rates.
The downside of this method, called laddering, is that it may eventually lower the yield as well.
Which are the best bonds to buy?
You need to choose the type of bonds that are best to include in your portfolio. What works for one investor may not be ideal for the next.You will need to assess your risk tolerance, as well as your income requirements. A good way to diversify your portfolio is to include US treasury bonds, municipal bonds as well as corporate bonds.
This will help you even out the interest rate risks and the default or principal risk.The downside of this is that you may need a lot of cash because bonds are usually sold in $1000 increments. That said, you can get over this problem if you do not have a lot of cash by purchasing bond ETFs.
So either way you slice it you can invest in multiple bonds on apps like stash app.
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