Consider the following tips if bonds are part of your investment portfolio:
- Determine your objectives before investing. Decide how much of your portfolio you want invested in bonds.
- Diversify your bond holdings among different bond types. Consider government, corporate, and municipal bonds, as well as different industries, credit ratings, and maturities.
- Understand the risks that affect bonds. The most significant risk is interest rate risk. When interest rates rise, bond values fall, while values rise when interest rates decline. Other risks include default risk, or the possibility the issuer will redeem the bond before maturity; and inflation risk, or the possibility that inflation will outpace the bond’s return.
- Choose bond maturity dates carefully. When you’ll need your principal is a major factor, but the current interest rate environment may also affect your decision. Rather than investing in one maturity, you may want to stagger or ladder the maturity dates in your portfolio.
- Follow interest rate trends. At a minimum, follow the prime rate, Treasury bill rates, and Treasury bond rates. Understand the significance of the yield curve and track its pattern over time. Y monitoring current interest rate level, you will be able to evaluate the appropriateness of an interest rate for a specific security.
- Compare interest rates for specific bonds before investing. Interest rates can vary substantially among different bond types and among bonds with different maturities or credit ratings.
- Research a bond before purchase. Review the credit quality, coupon rate, call provisions, and other significant factors. Determine whether the bond is appropriate for you in terms of risk, return, and maturity date.
- Consider the tax aspects. By comparing the after-tax rate of return for various types of bonds, you may be able to increase your return. Depending on the bond, the interest income may be fully taxable or exempt from federal and/or state income taxes.
- Review your bond holdings periodically. Evaluate the credit ratings of all your bonds at least annually to ensure the quality hasn’t deteriorated. Also, ensure your holdings are still consistent with your over-all investment objectives and asset allocation plan.
- Call for assistance with your bond holdings. You should use carefully designed strategies to make bond decisions. Please call if you need help.
Copyright © Integrated Concepts 2015. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.