Investors have been told that stocks are the best long-term savings vehicle and this sentiment is still present even in the wake of 2 market crashes. However, those who are downplaying the role of bonds are missing out on an opportunity. Bonds are actually as important today as they have ever been and you need to consider whole you should look at this instead of other investments.
As suggested by Sarkariniti, there are many investments which provide some type of income and bonds will generally offer the highest and most reliable income stream. This is true even when there are low prevailing rates as there are still a lot of different options such as high-yield bonds. These options can be used to construct a portfolio that provides the income that you need.
It is also important to note that a diversified bond portfolio will be able to provide a decent income with a lower level of volatility. You will also get a higher income than with any money market accounts or bank instruments. This makes bonds on of the best options for people who want to live off their investment income.
Anyone who has looked into investing has heard that you should not place all of your eggs in one basket. While this is a clichéd saying it is still very true and needs to be adhered to. Greater diversification of investments can provide a better risk-adjusted return over time than a narrow focus portfolio. Bonds also offer lower volatility and will preserve capital which is ideal for any equity investor when the financial markets are falling.
The Protection Of Principal
A fixed income investment is ideal for people who are coming to the point where they need to use the cash they have invested. This could be when the person is going to be retiring soon or when they need to pay for their child’s college. Stocks will experience high levels of volatility in a short period of time, a diversified bond portfolio will be less likely to suffer from market volatility in the short-term. This means that investors will generally be able to increase their allocation to a fixed income and decrease it when they are closer to their goal.
The Potential Tax Advantages
If you are looking to reduce your tax burden, there are a number of bond types that will be able to help you with this. Income which comes from bank instruments such as equities and money market funds are taxable unless they are held in a tax-deferred account, municipal bonds offer tax-free interest on the federal level. If these bonds are issued by the state you live in, they will also be free of state-level taxation.
Additionally, income from the US treasuries is tax-free on both local and state levels. Of course, is it important to note that it is not always wise to invest in these tax-advantaged securities, particularly if you are in a low tax bracket. However, the fixed income universe does offer a range of investments that can help you lower your tax burden.
Bonds do not make for interesting dinner party conversation and they do not get the same coverage in the financial press as stocks. However, they are still an investment opportunity that you should consider.