Fundamental Bond Investment Strategies.
Friday, November 24th, 2006
If you’re planning to invest in bonds, you need to define a strategy. Bonds come in different flavors ; high and low risk, high and low yield, floating rate or fixed rate; treasuries, municipal and corporate bonds, not to mention “junk bonds”. Any of these could find a place in your portfolio, depending on what you’re looking for. High returns? Regular income? Appreciation? Safety? Or a combination of all the above?
There are two fundamental aspects to bond investment strategy that you should consider.
Diversification
Simple - don’t put all your eggs in one basket. Or even focus on just one type of egg. Investment in multiple different types of bonds can significantly reduce your risk of capital or income loss.
Laddering
Bonds typically have a maturity date; when the principal gets redeemed. This can play a significant role in determining price fluctuations - if the maturity is a long time away, prices fluctuate more than compared to a short-duration / maturity bond. As the maturity date nears, the chances of changes in what you’ll get are much lower, resulting in more stable prices.
Buying bonds with staggered maturities is called laddering - you reduce the sensitivity to interest risk, provide for periodic reinvestment or cash out to meet any possible requirements, and can moderate or tweak your investment profile at periodic intervals.
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