Interested in bonds but not sure where to start? In four easy steps below, we’ll help you figure out:
- Which types of bonds to consider for your goals
- What time frame and risk tolerance is right for you
- And how involved you want to be in managing your bonds
Second, consider how long your investing horizon is.
Traditionally, longer-term bonds produce higher yields but also have higher interest rate risk—the risk that the value of a bond will fall if interest rates rise. Thus, your time frame may be one factor in determining the amount of interest rate risk you’re willing to take on.
LOW INTEREST RATE RISK
0 – 4 years average maturity
MEDIUM INTEREST RATE RISK
4 – 10 years average maturity
HIGH INTEREST RATE RISK
10+ years average maturity
Third, determine the level of credit risk you’re comfortable with.
Credit risk is the chance that the issuer of a bond will not be able to repay its debt obligations. With riskier lenders, the return may be higher, but the odds of an investor losing their principal rise.
LOW CREDIT RISK = CDs, Treasuries, agency bonds, agency mortgage-backed securities
MEDIUM CREDIT RISK = Investment-grade corporate or municipal bonds, international developed market bonds
HIGH CREDIT RISK = Preferred securities, emerging market debt, high-yield bonds, bank loans
Now that you know:
- Which types of bonds could fit your investment goals
- The time horizon you’re comfortable investing in
- And how involved you want to be in managing your bond portfolio
...you’re ready to start your search
for the bonds right for you.