Investing in bonds may not sound like much, but it’s actually fun when you look at it. Just as you put money into your passbook every month, a bond with a face value of $100,000 and an annual interest rate of 5% can earn you $5,000 a year in interest. To put it bluntly, you don’t have to worry about market winds and waves, and you can safely take a fixed interest, which is suitable for those who need a stable income. Bonds are much less risky than stocks jumping up and down. Plus, if the company fails, you get paid before the shareholders, and who doesn’t like that kind of protection? Moreover, bond trading is also convenient, want to sell to sell, do not worry about difficult to realize.
Stable Cash Flow
In the case of bonds, you buy a bond with a face value of $100,000 and an annual interest rate of 5%, and you have a steady income of $5,000 a year. The money is not subject to market fluctuations and can be collected monthly, quarterly or annually, for example, if you choose a quarter, you receive $1,250 each time. This is a great help for those who need regular expenses or want to supplement their income. For example, a person holding a 10-year bond could earn a total of $50,000 in interest. Even if, as in the 2008 financial crisis, other investments have plummeted, he still gets $5,000 a year in interest, such stability who does not love?
Risk Reduction
Compared with the daily jittery stock investment, bonds are really much more stable. Suppose you buy a $100,000 bond with a 4% annual interest rate, earning a fixed interest rate of $4,000 a year. No matter how volatile the market is, your interest stays the same. For example, in the 2008 financial crisis, stocks fell sharply, but the interest rate of bonds was stable, and the investment risk fell. And bonds issued by highly rated companies or governments have a very low risk of default and are safer. Another example is that during the epidemic in 2020, a person who holds a bond of 50,000 yuan will still have a steady interest rate of 2,000 yuan at 4% per year, and will not have to worry about the drastic fluctuations of the stock market.
Diversified Investment Portfolio
Portfolio diversification is when you divide your money into different places. Let’s say your portfolio is 60% stocks and 40% bonds. Stocks are volatile, but bonds are stable. If the stock market falls 10% and bonds return 4%, your losses are offset quite a bit by bonds. Let’s say you have a portfolio of $1 million, $600,000 is in stocks, $400,000 is in bonds, stocks fall 10%, a loss of $60,000, but bonds earn 4%, a gain of $1,600, and end up with a net loss of $44,000, which is much less than going all-stock. This strategy makes your investments more robust in an uncertain market environment.
Priority Repayment
The preference of bondholders in the event of bankruptcy makes your investment safer. Suppose a company issues a bond of 10 million yuan, and when the maturity of the company goes bankrupt, according to the law, the bondholders have priority over the shareholders to get repaid. If the company still has $6 million in assets, the money will be used to pay the bondholders first, and the shareholders will not get a penny. Let’s say you have $100,000 in bonds, and you end up getting $60,000 back. This priority makes bonds more secure than stocks and more secure for principal in times of economic turmoil.
Liquidity and Flexibility
Bond trading is convenient, strong liquidity, is one of its major features. You have a bond of 100,000 yuan, you suddenly need money, you can sell it in the market at any time, and you have strong liquidity. For example, a bond with an annual interest rate of 3% can be held for two years and sold, and still maintain the profit. Let’s say you bought a corporate bond of 200,000 yuan with an annual interest rate of 4% and pay interest every quarter. After holding it for one year, you need money and can sell it in the secondary market. During this period, you have already earned 8,000 yuan in interest. Government bonds are highly liquid, in demand and easy to sell.
Counteracting Inflation and Interest Rate Fluctuations
Bonds also offer protection against inflation and interest rate fluctuations. For example, if you hold a bond paying 5% interest and inflation is 3%, you still have a real yield of 2%. Let’s say you hold a $1 million bond that pays 4% annual interest and 2% inflation, and the real return is still 2%. In the case of Treasury inflation-protected Securities (TIPS), the principal and interest are adjusted for inflation, ensuring that purchasing power is not affected. The value of long-term bonds will fluctuate with changes in market interest rates, but the holding maturity is not affected, and the interest and principal are stable, such as a bond of 500,000 yuan with an annual interest rate of 4%, and the planned holding maturity is stable with an interest rate of 20,000 yuan per year.
