5 Questions Investors Should Ask about Bonds
When I talk with clients about their investment portfolios, they often think of stocks first and don’t spend as much time considering bonds. It’s important for any investor to have a healthy mix of different types of investments, because stocks and bonds have different risks and potential gains and losses.
Here are five common questions I get about bonds, with a few details on each. More information is available in the 10-minute podcast at the bottom of this page.
1. Why do people buy bonds?
People choose to make bonds part of their portfolios for several reasons, including principal preservation, fixed income, varied maturities and liquidity.
2. What kind of bonds are there?
Most people don’t realize that there are several types of bonds they can buy, including U.S. Treasuries, agency bonds, municipals, corporates and others.
3. How do bonds fit into my portfolio?
Bonds are often used with stocks to create the appropriate allocation mix. A growth mix would have more stocks and fewer bonds, while a balanced portfolio would split pretty evenly between stocks and bonds.
4. What happens to bonds in a rising interest rate environment?
Bond prices typically move in the opposite direction of interest rates. When interest rates are rising, bond prices fall. The shorter the maturity, the less the price moves and vice versa. The most volatile bond is usually one with a long maturity, 20 years or more.
5. How do I know which bonds to buy?
The answer to this question depends on your risk tolerance, bond ratings and tax advantages of certain types of bonds. Typically, the lower a bond’s risk is, the lower the potential yield.
Listen to the podcast below for more-detailed answers for each of these five questions.
Miriam Baird can be reached at (615) 620-1236 or firstname.lastname@example.org. She is based at Pinnacle’s downtown Nashville office at 150 Third Ave. South, Suite 900, Nashville, TN 37201.