Your typical independent investor will never be able to understand every aspect of bond investing. Research on bonds fills volumes. It is for this reason, therefore, that you do as much research as you can prior to investing, and if you can, take advantage of professional investors that can manage a portfolio for you.
1. Bond Ratings
Not all stocks are created equal – some are a strong buy whereas others are holds or sells. Bond ratings get assigned over 20 different possible designations, from AAA (Highest Grade) to C (May Be In Default) or worse. Also, those designations are backed by some of the most thorough historical and technical research on the planet.
2. High Predictability Makes A Safe Investment
Bonds always have an associated interest rate and a set maturity date. This makes bonds more predictable. Those two factors alone makes possible the use of an array of mathematical tools to provide predictions of future yields and price with a confidence unmatched by any other investment.
3. AAA Bonds
The absoulte best quality of bonds are ones that are rated AAA. They carry the smallest degree of investment risk, and thus, the least amount of reward. Interest payments are typically protected by a large or exceptionally stable margin and the principal is believed secure.
4. BAA Bonds
These are medium grade bonds and as such they are neither highly protected nor yeild a very high amount of return on your investment. BAA rated bonds are considered medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security are thought adequate at the time the rating is made, but might prove unreliable in the long run.
5. B Bonds
Bonds with B rating are generally considered speculative. Interest and principal payments are not assured. In other words, invest at your own risk. In general, bonds with higher ratings tend to have lower yields, so B bonds can actually give you a higher return on your investment. In 1991, for example, those who gambled on lower rated bonds reaped the highest total returns.
6. Are Bonds Better Than Stocks?
Even at the lowest end of the scale, bonds outpace quite a few stocks. Of course, this is all averaged out, and some stocks do much better than even the highest bonds. Bonds also have a large minimum investment in capital – $5,000 dollars, and so arent for your entry-level investor.
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