At Henssler Financial, our philosophy states that any funds needed within 10 years should be invested in high quality corporate or municipal bonds. Though the stock market has outperformed all other investment vehicles over time, attempting to beat the market in less than a 10-year window could be quite risky.
Types of Bonds
- Municipals: Bonds issued by state and/or local governments.
- Treasuries: Bonds issued by the federal government.
- Corporates: Bonds issued by public and private corporations.
Risks of Bond Investing
Interest Rate Risk
Bond prices and interest rates have an inverse relationship; interest rates go up, bond prices go down. Likewise, if interest rates decline, bond prices will increase.
The risk that the issuer will be unable to meet interest payment requirements and/or fail to refund the principal investment.
This risk is created by the uncertainty surrounding the secondary markets. In some instances, it may not be easy to convert your bond into cash prior to maturity.
The risk that the bond issuer will refund the principal prior to maturity. In many instances, a bond contract will allow the issuer to prematurely buy back its debt should conditions warrant. If interest rates decline, an issuer operating under a call provision may exercise that right and refund the bond by issuing lower interest rate debt.
Strategies for Managing a Bond Portfolio
Match maturity dates with your liquidity needs.
Invest only in high quality issues. Despite the relatively low risk in AAA rated corporate bonds, the differential as compared to U.S. Government bonds is minimal. The tax benefits and security will more than compensate. Choose Municipals rated AA or better and backed by an insurance agency. All U.S. Treasury Securities are backed by the full faith and credit of the United States Federal Government.
Hold your bonds until they mature to avoid interest rate and liquidity risk.
Choose bonds without call provisions. U.S. Treasuries do not have a call provision. Municipal bonds may have call provisions, but are usually available without them.
For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or [email protected].