Mention trading or investing and most people will think of stocks and picture a loud, fast paced trading floor, traders staring at their screens, pacing up and down the floor or shouting down hthe telephone. Well investing in treasury bonds is not quite the same pace but that does not mean it is not important and should not have an important place in your portfolio. There are advantages to stocks and bonds as well as disadvantages to both.
When deciding on how to structure your portfolio the first thing you need to do is have a plan. Decide how you want to invest, where and why. This will make all other decisions easier and more effective.
Before we look at some investments, it is important to understand the difference between stocks and bonds. This is explained quite simply in that bonds represent debt while stocks represent equity.
Here we are going to look at 4 benefits of investing in treasury bonds.
1. Bonds Are a Safe Bet
Understanding the difference mentioned above, debt provides a safer investment than equity. This is mainly because if there is a crisis, debtors take priority over shareholders. This is looking at an extreme scenario but is does give bonds that safety advantage.
Obviously, the old adage of risk versus reward is true so bonds do not yield very high returns. This is the price you pay for the risk-free investment in treasury trading. This is assuming we are not talking about junk bonds which can be very risky.
2. Bonds Yield Predictable Returns
While stock will yield higher returns in the long run, they are highly volatile and there are many occasions in an economic cycle where bonds offer a greater return. It may not be dramatic performance but bonds will offer you steady, progressive growth. It is a case of understanding your risk exposure and diversifying your portfolio. It is often necessary to have the predictability that bonds provide. As with everything in investments, timing is everything. If you need regular income or you might need to cash in your investment at an unpredictable time, bonds might well be the way to go.
3. Bonds Outperform the Bank
As much as the return on bonds is not great, they will still be better than what you could get at a bank. There are times, especially with long term investments, where bonds would be a very wise choice. A good example is education savings where you need fair growth over the long term with no risk attached. The end result of your investment will be relatively easy to predict with a fair amount of accuracy.
4. Bonds Are Highly Liquid
Although not encouraged, you will always have instant access to your money should you requite it, even before the bond has matured. All that will happen is the investment will be discounted and you will not get the full amount promised at maturity.
They also do not attract broker’s fees or charges unlike stocks.
There are a number of factors you need to consider in order to determine how much of your money to put into bonds. Consider your risk tolerance, investing timeline, future goals, income and your perception of the market.
As you are no doubt aware, it is vital to have diversification in your portfolio. Bonds can play an important part by introducing stability and en element of certainty, If and when stocks are underperforming, you can still rely on the income from bonds. They also have an important role for specific investment requirements.