Bond Investment Strategies
When it comes to investing in bonds, the most important consideration is to have a strategy in place that will provide the most benefit and help you reach your goals while minimizing the risk associated with fluctuations in interest rates.
As their name implies, barbell investment strategies have an increased focus on the edges of the purchases.
For this type of investment, purchases focus only on bonds that mature in 1 to 2 years and 8 to 10 years.
The longer-term bonds provide increased interest payments, while the short-term options free up proceeds that can be reinvested.
The barbell method also allows investors to consider alternative investments when the short-term bonds mature if interest rates decline, providing a means of further decreasing the potential risk.
Another bond investment strategy is known as the bullets method.
Those who have a set goal that needs to be financed in the future, such as a child’s college tuition, often use the bullets strategy.
For this method, the investor chooses bonds that are set to mature in time for him or her to meet the goals. For example, for a 10-year-old child, the investor would purchase bonds today that would reach maturity in 8 years. The following year, the bonds purchased will mature in seven years.
This pattern continues until the goal is met. This bond investment strategy allows the investor to capitalize on interest rate changes and save for the stated goal.
A ladder investment strategy is a great option for those who want a more predictable cash flow based on their investments.
For this method, bonds are purchased with maturity dates at set intervals.
The shortest maturity dates are the bottom rungs of the ladder, with each rung increasing in a term. When the short-term bonds mature, the proceeds are reinvested into long-term maturity options, which then become the highest rungs of the ladder.
For many who choose this bond investment strategy, there are bonds that mature annually, providing a means of mitigating the risks associated with increasing interest rates while providing cash flow.
Choose the right bond investment strategies depend on your own needs and available capital. Additionally, the method needs to fit in with your current and future goals to ensure the best outcomes for your situation.
It is also important to make sure that you are willing to take the time to monitor your investments so they can be reinvested properly. Investors must understand that they need to stick with the chosen plan in order to see the best potential returns as well.
While it is possible to use a combination of these bond investment strategies, proper monitoring and reinvesting of each plan is required in order to reach your goals.
If you have any doubts as to whether you will monitor and reinvest properly, you may want to consider seeking professional advice before you begin your plan.