LML Group in Hong Kong Answers the Question: Why Bonds?
Let’s take a break from health and let my friend Dave introduce us to his expertise in investments. We need some amount of wealth to maintain our health. Dave works for The LML Group Richmond & Associates Inc. , Hong Kong Savings & Investments; and he will be discussing bonds.
Investing in bonds allows investors to construct a portfolio that is well-diversified. The investment in stocks, bonds and cash can lead to a balanced portfolio if each investment is constructed to meet individual investment objectives. Using efforts to be compatible with every investor’s different risk tolerance and investment goals, the different investments contain varying percentages. Many factors need to be taken into consideration such as the interest rate on bonds, price, maturity, tax status etc.
The decision as to which bond one should invest in will very and important factor to consider will be the interest rate of the bond.
Bonds are available with interest rates that are fixed, adjustable, or payable when they mature. A bond that is fixed means that the interest rate is the same until maturity and the interest rate paid is a percentage of the principal amount. Floating or adjustable bonds are comprised of an interest rate that tracks closely with current market rates. The interest rates change sporadically with the rate index for this type of bond. The final type of bond is one that pays out the interest earned plus the principal amount in a single payment when the bond matures.
Part of the decision making process when investing in bonds is to choose whether to invest in short-term bonds, medium or long term ones. It usually takes short-term bonds five years to mature; intermediate bonds five to twelve years, and long term bonds more than twelve years to reach maturity. The term maturity indicates the date when the principal amount invested by the investor is repaid. This time period can be of varied lengths and can be as long as thirty years.
We here at THE LML GROUP HONG KONG believe each investor should understand the facts when investing in bonds. The beginners in the field should be aware of the fact that there is a possibility of losing money while investing in bonds and that their price moves in the direction opposite of interest rates. If you hold onto the bond until maturity, then it doesn’t matter when interest rates fall, bond prices rise. At maturity you’ll receive the amount written on the face of the bond as well as any interest that has accrued. Be aware that stocks do not always outperform bonds, so you should research bond investments and investing in stocks so that your portfolio is balanced to achieve diversification.