There are many options out on the market today for your financial portfolio. Many advisors recommend that you diversify your savings in order to help limit your downside and increase your potential upside. Bonds should be an important part of your portfolio. Let’s find out why.
Bonds are an important investment vehicle for those that plan to live off their retirement income. Bonds often have lower upside as far as investments go but their downside is much less. A diversified bond portfolio can offer a low level of volatility while delivering decent yields. Often bonds can have a higher return than some money market funds as well as bank instruments. However, most bonds will not outperform most stocks but will be much more risk-averse than your typical stock portfolio.
Bonds can also help diversify your stock portfolio during down market times. This can help to preserve capital when otherwise your stock portfolio may be falling. Bonds can provide a decent hedge against falling stock prices for those who need that short-term protection.
One downside to the bond market is that it is not necessarily geared towards a casual investor. For the stock market, almost anyone can open a trading account and being trading stocks today. For the bond market, it is hard for an everyday investor to get access and find prices for even the most popular bonds.
Bonds also provide an avenue in order to reduce your tax burden. Municipal bonds on the federal level provide tax free interest as well as state level municipal bonds. This is a big difference from traditional investment methods that often would require the interest to be held in a tax-deferred account. Bonds provide the tax-free gains that you may be looking for while spending your retirement.
Bonds are never a great conversation to have around the dinner table. Often low risk investments are skipped over in favor of more lucrative investment vehicles. However, If you are looking to live off your investments when you retire and what to be more risk adverse, bonds can provide a great way to counter the volatility of traditional markets while also decreasing the tax liabilities you may find with stocks.