Let’s say you are a novice investor, not an amateur hour trader, an investor with a serious approach but a lack of profound experience. You want to build a strong, risk-free portfolio.
Concentrating on one security is a common misstep. If you plan to invest all your money in a single stock, brace yourself for failure. Instead, including various instruments into your portfolio is a good start. Try to spread your funds across stocks, ETFs, commodities and don’t forget about bonds.
Bonds are one of the safest types of securities. First, bonds are debt, whereas stocks are equity. Buying into debt is far better than buying into equity, as debt is not tied to the asset performance. Bonds fit any portfolio and help investors to sail through risks diversification process.
The principle is simple, don’t rely heavily on stocks. Diversify. Once you invest only in stocks, you end up being dependent on the market moves. The situation can become harsh when you need to pay bills and investment is the only source of your income.
Bonds are much safer. See for yourself. You are entitled to coupon payments that don’t depend on bull or bear market. After all, you can eventually get the original sum, or a principal, upon a bond maturity.
Bonds are predictable. They carry less risk compared to other equities, and they pay off with a fair level of guarantee. The flip side is that payments are not so high as stocks can be. Let’s take a closer look.
Companies often issue bonds to attract extra capital. Such bonds are associated with credit risks. Before buying a corporate bond, it's critical to ensure a company is not balancing on the brink of bankruptcy and is able to meet its debt obligations in the future.
There are special rating agencies that are here to prevent you from lame investments. For example, Moody's. The agency keeps a keen eye on corporations and provides investors with an honest and clear ratings, so they won’t go to pieces.
Analyse yields and take into account the maturity date. A yield is a return you receive from a bond while you hold it. The maturity date is the period when you receive the final payment on your holding. It’s important to pay special attention to yields when you compare two corporate bonds. Investors tend to pick up those with a longer maturity and higher yield. That means that a four-year corporate bond with a 7% yield will be more attractive to investors than a ten-year corporate bond with a 5 % yield. But that’s not a rule of thumb, nor it a tendency.
Factors that help us to make the right corporate bond investment are aplenty. It’s important to take into account everything that can affect your future payments.