Top Advantages of Bonds

Tracking bonds is not the most fun thing to do. It is about as interesting as watching a pot boil or paint dry. It is not as exciting as watching stocks—you have probably seen how investors get. But the lack of hype should not mislead you. Bonds and stocks both have their advantages and disadvantages. 

This post will highlight the pros of bonds and give you some good reasons as to why they should be in your portfolio. 

Main Takeaways

• Bonds may be less exciting than stocks but they would be great in your portfolio.
• Bonds, unlike stocks, are less risky and less volatile. If you hold them to maturity, you may get consistent and stable returns.
• Bonds interest rates are higher than money market accounts, CDs and bank savings interest rates. 
• When stocks are falling, bonds tend to perform better.

Safe Haven for Your Money

The key difference between bonds and stocks can be fitted into three words: debt versus equity.

Bonds are a debt while stocks are equity ownership. 

Investing in debt is always safer compared to investing in equity. If the business is declared bankrupt, debtholders (creditors) are paid before shareholders. Creditors are more likely to get their money while the shareholders may lose theirs altogether. 

Treasury Bonds (U.S Government bonds) are risk-free, whereas there’s no such thing as a risk-free stock. Bonds may not yield high returns (just about 3% annual interest rate) but they are the best for capital preservation. 

It is important to note that bonds may be safer but they are not 100% safe. Also, other bond types, such as junk bonds, are very risky. 

Predictable Returns

In the long run, stocks tend to outperform bonds, if history is anything to go by. But at certain points, bonds perform better. Stocks can lose 10% or even more in a single year. If this happens, you will be lucky to have bonds in your portfolio to ease the blow. 

Another thing, people will need predictability and security sometimes. Think of retirees, for example. They may depend on the predictability of bond income. With only stocks in your portfolio, retiring into a bear market will be disappointing, to say the least. 

Better Than Saving with the Bank? 

Bonds typically have higher interest rates than a CD or savings account. If you have some money that you won’t use for a while (like a year), it is better to invest in bonds.

Having money in the bank is not bad. But you will not get any returns. 

How Much Should You Invest in Bonds?

You won’t get a direct answer. However, there is an old rule that some investors use. Your allocation among cash, bonds and stocks should depend on your age. According to this rule, you should subtract your age from 100. The number you get is the percentage of your assets that should go into stocks, then spread the rest between cash and bonds. If you are 50, 50% should go to stocks and 50% to cash and bonds.