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Bond Investment: Five Essential Keys for Smart Investors

March 11, 2024

By Andrew Lawrie
Director of Investment Services
Kensington Wealth Partners, Ltd.

When most of the world thinks about investing, the stock market immediately comes to mind. Stocks tend to be more popular to individuals because of their high risk/high reward characteristics. But what may surprise you is that there is another market of securities that offers an even larger breadth of options, the bond market.

As of March 2023, the bond market was valued at around $300 trillion, while the global stock market was worth $124.4 trillion. Most financial professionals agree that bonds are essential to building a diversified portfolio in wealth management. Bonds often play an important role in preserving capital or producing a steady stream of income.

In many ways, however, the bond market can be even more complex and harder to understand than the stock market because of the variety of bonds that work in different ways, serve different purposes, and are offered by different entities. Some financial professionals might even admit that they don’t understand the bond market completely, due to the vastness of opportunities. Therefore, we thought it might be helpful to share a few basics of bond investing.

Types of bonds

Unlike stocks which offer ownership in a company, bonds are essentially a type of loan where an investor lends money for a set period of time to a company or government entity in exchange for regular interest payments.

In general, there are four main types of bonds: corporate bonds, municipal bonds, U.S. government bonds and international market bonds. Under these overarching types, there are varied options for investing.

For example, corporate bonds are offered through private or public corporations while municipal bonds, often called “munis,” are offered through local government organizations, including states, cities, and other municipalities. Other types of bonds include inflation-protected bonds, floating-rate bonds, revenue bonds, conduit bonds, junk bonds, and the list goes on. All types of bonds may offer a wide degree of risk, yield and duration. Because of this, it’s best to have a financial professional assist with a strategy around bond investments.

How to invest

Most individual investors who invest in bonds do so through bond mutual funds. Bond funds are a collection of bonds that are bought, sold and traded by the fund manager and his or her team of fund analysts.

However, bonds can be bought on an individual level at places like your bank, directly from the government, through your financial advisor, or your broker-dealer.

Bond investment benefits

The benefits of investing in bonds are that they offer you a stream of income, preserve capital and diversify your portfolio to sustain differing market conditions. Bonds are also less risky than stocks because if a company were to go into bankruptcy, debt holders are paid out before those who hold equity (stocks).

Each type of bond may offer its own additional benefits, too. For example, at Kensington Wealth, we often allocate a portion of our higher income tax bracket clients’ assets into municipal bonds. One of the main benefits of investing in municipal bonds is that the interest payments are often tax-free, so you keep all of the interest paid to you.

Bond investment cautions

Something to be cautious of when investing in bonds are rising and falling interest rates. When rates go up, bond values will drop. Although bonds are a low-risk investment, there is also a possibility for an entity to default on their bonds. But defaults aren’t always as bad as they sound. For example, a default could mean failure to make one single interest payment. When this happens the payments are often made up later.

In conclusion, the value of a bond can go up and down as interest rates fluctuate. However, if you hold the bond to maturity you will receive your principal back in addition to the interest payments you received over the life of the investment.

It is always best to seek advice on what type of bond you should purchase to meet your needs, as different bonds serve different purposes. If you’re interested in learning more about which bonds may fit you best, our Kensington team is here to help!

Andrew Lawrie serves as Director of Investment Services at Kensington Wealth Partners, Ltd. He has 20+ years of experience in the financial services and investment management industry and holds a Chartered Financial Consultant (ChFC) designation as well as a FINRA Series 7 license.

Andrew Lawrie is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Kensington Wealth Partners is not an affiliate of Lincoln Financial Advisors Corp.

This information is for educational purposes only. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.  Investments mentioned may not be suitable for all investors. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.

Bonds have fixed principal value and yield if held to maturity. Prices of fixed-income securities may fluctuate due to inflation, credit and interest rate changes. Investors may lose money if bonds are sold before maturity. Diversification neither ensures a profit nor protects against a loss.  Investing involves risk, and investors may incur a profit or loss.