Bond investment is an essential part of building a well-balanced portfolio. Morgan Stanley recommends a conservative allocation of 60% of your assets in the stock market and 35% in bonds, with the remainder in cash. However, don't just blindly invest in bonds; determine your investment strategy before you begin building your portfolio.
Consider Diversification First
You've heard it before, and you'll hear it again: diversify, diversify, diversify. Diversification is an important part of any solid bond investment strategy. Consider a mix of corporate bonds, municipal bonds, government bonds, agency bonds and mortgage-backed securities to hedge against fluctuation in one sector.
One aspect of diversification that people often overlook when considering the best investment strategy for them is diversification by maturity. When investing in bonds, you can use the maturity to help plan for specific long-term goals, or to give yourself the option to reinvest your principal at advantageous interest rate levels. Diversification by maturity is just as important as diversification by asset class, so take this into consideration when building a bond investment strategy.
The Buy-and-Hold Strategy
When you buy and hold your bond investments, you might not have to worry as much about changes in interest rates that affect bond values. You're simply holding the bond until it reaches maturity, at which point you'll realize your gain.
A laddered portfolio, where you buy bonds at different maturity lengths, might help you benefit from changes in interest rates without having to sell and reinvest your bonds early. When one bond matures, you can choose to invest it again at the current interest rates or reallocate it to another sector, while still having additional bonds ready to mature in the future when interest rates may change yet again.
Zero Coupon Bonds or the Bullet Investment Strategy
If you're saving for a specific goal, such as a college education for your young child or buying a home in 10 or 15 years, consider a zero coupon bond or bullet investment strategy to try to hedge against changes in the bond market. Zero coupon bonds don't pay out interest during the life of the bond; instead, you buy the bond at a fraction of its value, and then you receive the bond's full value at maturity. With zero coupon bonds, you're locking in a rate. However, you can't make a move if interest rates go up.
The bullet investment strategy involves staggering your bond investments to pay out at a specific time in order to benefit from fluctuations in interest rates. Using the bullet investment strategy to plan for an event 15 years away, you might by a 15-year bond today, invest in a 10-year bond in five years, and purchase a five-year bond in 10 years, so that they all mature simultaneously in 15 years.
 | A mutual fund's prospectus describes the fund's objectives and the securities it invests in. The name of the mutual fund can be revealing, but you should check out the objectives and strategy to find out its goals. |
 | Understanding the basics behind investing in bonds will help you decide whether this type of investment is right for you. Bonds are investment securities that represent debt obligations between the bonds' issuers, who are the borrowers, and investors like you, who are the lenders. In other words, bonds are essentially the IOUs of the corporate and government financial worlds. |
 | If you're new to the world of investments, you may be surprised by the many types of bonds available. Bonds are essentially loans. However, not all bonds are alike. You will want to understand the following bonds before you invest. |
When an investor, financial institution, mutual fund or foreign Government wants to protect itself from inflation, it may enter into one or more of several financial vehicles designed to protect their financial interests from inflation. |
There are certain things you must understand about bonds before you start investing in them. Not understanding these things may cause you to purchase the wrong bonds, at the wrong maturity date. Think of a bond as an I.O.U. |
