Introduction To Bonds - Why Invest In Bonds?

Investment professionals, finance theorists, and common sense all agree that investors should maintain diversified portfolios. By spreading funds across a variety of different types of investments, diversified portfolios generally offer more reliable and stable returns over time. The three main components of a diversified portfolio are equities, bonds and cash. In order to figure out an appropriate mixture of these three, each individual must consider his or her own financial goals and tolerance for risk.

Most individual investors do not hold any bonds or have only a small part of their portfolio in bonds. For these investors, a new investment in bonds or a shift in asset allocation towards bonds, could be a valuable strategy in increasing portfolio diversity. As a general rule of thumb, bonds, as compared to stocks, offer more dependable current income and greater safety of principal. In addition, high tax bracket individuals may be able to decrease their tax burden through investing in US Treasury Bonds and Municipal obligations.

Bonds can also be a valuable tool for increasing the overall value of one's investment portfolio. Just like stocks, fixed-income investments can lead to long-term capital gains. Bond prices can be volatile and are subject to many factors (read Factors Driving Bond Prices). Capital gains can be earned in periods of declining interest rates, whereas losses can be incurred if securities are sold prior to maturity in increasing interest rate environments.

The wide variety and availability of fixed income securities and Bond funds offer choices for the full spectrum of investors. Bonds can be used conservatively by investors primarily interested in supplementing current income or more aggressively by investors seeking to capture capital gains.