Bonds: You be the Bank
- Team KAS
- Jul 9, 2023
- 3 min read
Like the idea of getting a return on your investment, but want to limit the risk of losing money? Introducing stocks' responsible brother: bonds!
For a lot of investors who trade on the stock market, buying and selling stock is as much an adrenaline rush as it is a means to multiply their investments. But for others, the complexity and risk involved is more than they are willing to take on. Luckily there are bonds, a much tamer way to see an return on the extra cash you may have lying around your bank account.
What are Bonds?
A bond is a loan that you make to a company or government. In return for your loan, the company or government agrees to pay you interest over a certain period of time, and then repay the full amount of your loan at the end of the term. So essentially, you are acting as the bank by providing funding to companies or entities who are in need of capital (aka money).
Did You Know: The first bonds were issued in ancient Babylonia in the 2nd millennium BC. The bonds were issued by the government to finance public works projects.
Types of Bonds?
There are many different types of bonds, but some of the most common include:
Government bonds: These are bonds issued by governments. They are considered to be very safe investments, but they typically offer lower interest rates than other types of bonds.
Corporate bonds: These are bonds issued by companies. They are considered to be riskier investments than government bonds, but they typically offer higher interest rates.
Municipal bonds: These are bonds issued by state and local governments. They are considered to be very safe investments, and they often offer tax advantages.
Pros
Diversifying you portfolio is always a good idea and with bonds you can enjoy a number of positive outcomes
Investment with Training Wheels: Bonds are relatively safe investments: Since there is a structured agreement between you and the bond issuer, you are significantly more likely to see the promised returns. This is unlike stocks. which are dependent on supply and demand rather than the issuer's ability to repay.
Keep Those Checks Coming: Bonds offer regular income in the form of interest payments: Unlike stocks which do not have an established dividend schedule, bonds provide predictable revenue for the money invested.
The Voice of Reason in your Portfolio: Bonds can help to reduce risk in a diversified portfolio: Because they are so stable, bonds make a great foundation for your portfolio. They add stability and help to offset possible losses you may incur from stocks which my have lost some of their volume.
What is your risk tolerance when it comes to investing?
0%High. Day trading is my favorite sport!
0%Medium. I like to keep a bit of everything in my portfolio.
0%Low. Bonds and mutual fund only please.
Cons
We're all familiar with the phrase "with great risk comes great reward", but with bonds the relatively low risk does come with some drawbacks:
Safety at a Price: Bonds typically offer lower returns than other types of investments, such as stocks. In this case you are trading a bit of profit for predictability.
Your Cash is on Ice: Bonds can be illiquid, meaning that it can be difficult to sell them quickly if you need cash. Since you've agreed to be repaid over a set period of time, liquidating bonds is a slow process and can come with heavy fees.
There is No Guaranteed Investment: Even though bonds are lower risk than some other forms of investing, that does not make them risk proof. Bonds are subject to interest rate risk, which means that their prices can go down if interest rates rise.
How We Can Help
Bonds can be a good investment for those who are looking for a safe and reliable source of income. However, it is important to remember that bonds are not without risk, and investors should carefully consider their investment goals and risk tolerance before investing in bonds.
If you've made investments in the past and haven't reported them, now is the time! Don't wait for the IRS to catch up to you. Click one of the buttons below to get started. We'll file or amend your past returns and make sure you receive the benefit of your investing.
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