Bonds are an important part of many investing strategies. But they can be more complicated than buying a stock, receiving its dividends, and selling when you choose. Bonds have fixed maturity dates but they also offer various returns on that investment both while you have it and when you divest from it.
How can you use these parameters to craft a bond strategy for specific investing needs? Here are three scenarios depending on your goal for the investment.
Scenario 1: Saving for a Life Event
Bonds are a great choice for anyone saving for a specific life event — such as paying for college or buying a home — because bonds have a strict target date when your investment ends and the money frees up. But if you buy just one bond with one end date, you may miss out on any positive changes in the bond market during the intervening years.
Instead, consider staggering the purchase and terms of multiple bonds. Need to pay for college in 10 years? Then you might buy a set of bonds now with a 10-year maturity date. In addition, plan to purchase additional five-year bonds in five years. These will all mature at the same time, but you can take advantage of changes in the market during the decade and don't have to fund the entire purchase now.
Scenario 2: Crafting Retirement Income
With retirement, you may not want to have all your money become available at once but rather need a steady income over a number of years. One way to construct this steady income is to avoid having all your bonds mature at once. Instead, your ladder may be comprised of many individual bond terms with varying maturity dates.
For example, if you plan to retire in ten years and begin withdrawing money, you might buy a series of bonds ranging from two years to 15 years. As each bond matures, you can reinvest it for growth until your retirement date. Then, as each matures after retirement, you have access to the funds for living expenses. Your ladder could provide annual or bi-annual income or it might even be more often. The choice is yours.
Scenario 3: Balancing Your Investments
Not every investment is targeted at a particular goal. You may simply want to design an overall investment portfolio that balances growth with safety. As a rule of thumb, bonds provide protection against market fluctuation, while stocks tend to provide more growth. Balance is achieved when you deploy them both wisely.
Remember that you aren't limited to just the choice of bond term lengths. You can also choose different bonds like municipal bonds, treasuries, investment-grade corporate bonds, and high-yield bonds. Some of these bonds (like government agency bonds) are safer than most, while others (including so-called junk bonds) provide a higher return on your investment.
Holding a variety of bonds allows you not only to reinvest and purchase new bonds at different times in the market but also to sell some if you wish. Bonds can become more valuable if there is a downturn in interest rates (making older, higher-return bonds more appealing). If this happens, you might sell some bonds to reap the profit. But with diversification, the choice to sell any bond doesn't derail your plan.
Where to Start
Building a forward-thinking but reliable bond strategy takes effort and know-how. Bonds often seem somewhat simple, but this can be misleading. The modern investor has many choices. At Presidio Wealth Management, we have experience with all types of bonds and how to use them to reach individual goals. Make an appointment today to discuss your needs with one of our investment professionals.