Most people think of investing in Bonds as being a dry subject, and to a degree, they are right. However, boring can sometimes be a good thing, especially when it comes to investments. Too much "excitement" in your portfolio can lead to undue stress, so a diet rich in bonds and bond mutual funds can help smooth out the rough edges in a portfolio made up mostly of common stocks.
Bonds are generally considered to be less risky than stocks, but they are not without peril in their own right. The risk in a bond is directly related to the issuing company, and the type of debt instrument. Depending on the type of debt issued, and what underlying assets are involved, certain bond investments can be as risky or more risky than investing in stocks. But there's good news: with a higher risk generally comes a greater return.
Bonds tend to be less flexible to trade than common shares, so most individual investors will end up investing a a bond mutual fund. This has many advantages for the beginning investor, not the least of which is that she can rely on the investment experience of a firm that specializes in analyzing the companies, and their capability of repaying their notes.
The biggest risk associated with bonds is referred to as the interest rate risk. This term refers to changes in the market interest rates, which have a direct bearing on bond returns. Fixed-income securities, in general, move inversely with the changes in interest rates. What this means is that during a period of rising interest rates, like the current climate in the U.S. in 2006, people holding bonds will end up seeing declining bond returns. This will affect long-term issues the most.
In fact, the longer the time to maturity, the greater the risk of interest rate erosion becomes. For this reason, careful pruning of a bond portfolio becomes of greatest interest to the fund manager. One technique bond mutual funds use is staggering maturity dates so that they have less risk based on any one scenario. The great size of the funds allow them to do this easily and quickly.
The biggest risk for any bond holder is the risk that the company will default before making its' scheduled payments. This is directly related to how credit worthy the company is, and their capacity and will to repay their debts. Companies with lower credit ratings have to pay higher interest rates, just like consumers in the same boat. The worse the credit, the higher the interest rates to bond holders have to be in order to attract investment dollars. Companies with excellent credit ratings pay a much lower cost for capital, which is one of the reasons they have superior credit in the first place!
Whenever considering an investment in a bond, make sure first and foremost that the company has an excellent rating from Standard and Poors or Moody's. This will ensure they have the capacity to pay back your loan to them over the entire duration of the bond contract.
Often in the movies you see a person get a 'great tip' and run to buy up that stock and make a fortune. They are buying and selling as quick as they can when tips come in and while they may have started with a few dollars, suddenly they are a millionaire. Real life is not like the movies. In real life more often than not those great investing tips are scams. They may come in the form of e-mails that offer just you a hot tip about the next big thing that will be hitting the market. The only person who is going to profit from this deal is the person who sent you the e-mail. Usually they are the owner of a company that will profit when everyone jumps onto that stock. They will sell to you for a higher price and then when the stock goes to it's real value, which is much lower than the hype has made it, they will reap the profits while you will lose your hard earned money. Instead, you should only put your money into wise investments. One of the wisest is real estate. Sure, real estate, like every other market, is dealing with a tough time right now. But that does not mean it is going to fall through the floor. Instead real estate mutual funds and REITs have the benefit of a little more stability since they are built on the foundation of a tangible asset ? real estate. In addition to knowing which market to invest in, there are plenty of avenues in those markets. While you could purchase individual stocks or bonds, you may want to go with something a little more solid and diverse like real estate mutual funds and REITs or real estate investment trusts. The reason these are more solid is that they are not putting all of their eggs in one basket. Instead the real estate mutual fund or REIT basket is filled with a number of real estate related stocks and bonds and therefore you are getting a lot of shares for one buy in. The hard part is often picking which one you want. By going onto a website like REITBuyer.com you can look at the latest news and research on real estate mutual funds and REITs. REITBuyer.com is the first and only online brokerage specializing in REITs and real estate mutual funds so you will have all the information you need at your fingertips without having to dig through information that is useless to you. Once you've selected the real estate mutual fund or REIT that is right for you, you will also be able to make a purchase and watch your portfolio in the same place. This article was written by Earl E. Bird, III, spokesperson for the REIT Buyer.com, a full service online information resource dedicated to assisting investors who are interested in learning more about Real Estate Investment Trusts (REITs), Real Estate Mutual Funds and how to invest in them. Visit http://www.reitbuyer.com to learn more.
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