Post by xray on Dec 7, 2022 22:08:50 GMT
SmartAsset
Everything You Need to Know About Investing in Bonds Right Now
Ben Geier, CEPF®
Wed, December 7, 2022, 12:58 PM
Bonds are one of the two most basic investment options, along with stocks. While stocks are fairly well understood - you buy a piece of a company and make money when the company does well and becomes worth more - bonds are a bit more mysterious. You aren't buying a part of the company, but rather you're essentially lending the company - or, in the case of municipal and federal bonds, the government - money, with the expectation that you will get paid back with interest after a set period of time.
The bond market has been strongly impacted by the economic volatility that has cropped up in 2022. Anyone looking to start investing in bonds right now should understand the current state of the market and how to get the most out of bond investing at this particular time. This page will walk you through what you need to know. For more help investing in bonds or with any other financial considerations, consider working with a financial advisor.
Bond Investing Basics
First, it's important to know how bond investing works regardless of the current financial and economic situation. As noted above, a bond is an investment where you lend money to an entity and get paid back with interest later. Bonds are considered fixed-income investments in that you know when you purchase it exactly how much you'll get back. This is opposed to equities like stocks, where how much money you make or lose is determined by the performance of the company. Bonds purchased from companies are called corporate bonds, while bonds purchased from local governments are known as municipal bonds. You can also bonds from the federal government - these are known as Treasury bonds or T-Bonds. While bonds aren't impacted by the swings of the stock market, they do respond to changes the Federal Reserve makes to interest rates. When interest rates go up, the price of existing bonds falls; by contrast, when interest rates drop, the price of bonds goes up. Buying bonds is fairly simple. You can buy Treasury bonds directly from the government, while you'll need to use an online brokerage account to purchase municipal and corporate bonds. For a diversified portfolio of bonds, you can also put money into a bond mutual fund or purchase shares of a bond exchange-traded fund (ETF).
Following the chaos caused by the COVID-19 pandemic and response, the economy is certainly volatile in 2022. One of the biggest problems currently facing Americans is inflation, which is rising at the highest rates in decades. The biggest tool the federal government has to fight inflation is to raise interest rates, which limits the amount of money being pumped into the economy in the form of loans. As noted above, though, there is a reaction on the bond market when interest rates are high; namely, the value of existing bonds goes down as interest rates go up. With new bonds having a higher interest rate, existing bonds simply become worth less. That means that, right now, bonds are generally losing value.
Much as stock investors are urged to hold onto their shares during the bear market, bond investors should know that interest rates won't rise forever - and should therefor note try to exit the market in a rush. Trying to get out of the market now would ultimately mean selling low, and that's never a good idea. If you don't feel comfortable getting into the corporate bond market right now, Treasury I bonds are a solid entry into the world of bonds. These federal bonds have a guaranteed return which is adjusted based on inflation. The next adjustment will be coming soon. The experts at Vanguard recommend I bonds along with high-yield bonds and municipal bonds as investments in 2022.
The Bottom Line
Increases to interest rates have made life difficult for bond investors right now, as interest rate hikes lead to bond value decreases. Still, waiting out the inflationary period of rising rates might be the best play, just like stock inventors are waiting out the bear market.
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Live Long and Prosper....
Everything You Need to Know About Investing in Bonds Right Now
Ben Geier, CEPF®
Wed, December 7, 2022, 12:58 PM
Bonds are one of the two most basic investment options, along with stocks. While stocks are fairly well understood - you buy a piece of a company and make money when the company does well and becomes worth more - bonds are a bit more mysterious. You aren't buying a part of the company, but rather you're essentially lending the company - or, in the case of municipal and federal bonds, the government - money, with the expectation that you will get paid back with interest after a set period of time.
The bond market has been strongly impacted by the economic volatility that has cropped up in 2022. Anyone looking to start investing in bonds right now should understand the current state of the market and how to get the most out of bond investing at this particular time. This page will walk you through what you need to know. For more help investing in bonds or with any other financial considerations, consider working with a financial advisor.
Bond Investing Basics
First, it's important to know how bond investing works regardless of the current financial and economic situation. As noted above, a bond is an investment where you lend money to an entity and get paid back with interest later. Bonds are considered fixed-income investments in that you know when you purchase it exactly how much you'll get back. This is opposed to equities like stocks, where how much money you make or lose is determined by the performance of the company. Bonds purchased from companies are called corporate bonds, while bonds purchased from local governments are known as municipal bonds. You can also bonds from the federal government - these are known as Treasury bonds or T-Bonds. While bonds aren't impacted by the swings of the stock market, they do respond to changes the Federal Reserve makes to interest rates. When interest rates go up, the price of existing bonds falls; by contrast, when interest rates drop, the price of bonds goes up. Buying bonds is fairly simple. You can buy Treasury bonds directly from the government, while you'll need to use an online brokerage account to purchase municipal and corporate bonds. For a diversified portfolio of bonds, you can also put money into a bond mutual fund or purchase shares of a bond exchange-traded fund (ETF).
Following the chaos caused by the COVID-19 pandemic and response, the economy is certainly volatile in 2022. One of the biggest problems currently facing Americans is inflation, which is rising at the highest rates in decades. The biggest tool the federal government has to fight inflation is to raise interest rates, which limits the amount of money being pumped into the economy in the form of loans. As noted above, though, there is a reaction on the bond market when interest rates are high; namely, the value of existing bonds goes down as interest rates go up. With new bonds having a higher interest rate, existing bonds simply become worth less. That means that, right now, bonds are generally losing value.
Much as stock investors are urged to hold onto their shares during the bear market, bond investors should know that interest rates won't rise forever - and should therefor note try to exit the market in a rush. Trying to get out of the market now would ultimately mean selling low, and that's never a good idea. If you don't feel comfortable getting into the corporate bond market right now, Treasury I bonds are a solid entry into the world of bonds. These federal bonds have a guaranteed return which is adjusted based on inflation. The next adjustment will be coming soon. The experts at Vanguard recommend I bonds along with high-yield bonds and municipal bonds as investments in 2022.
The Bottom Line
Increases to interest rates have made life difficult for bond investors right now, as interest rate hikes lead to bond value decreases. Still, waiting out the inflationary period of rising rates might be the best play, just like stock inventors are waiting out the bear market.
-----------
Live Long and Prosper....