Investing in Both Stocks and Bonds
Almost every financial expert recommends the inclusion of both stocks and bonds in investment portfolios. Since bonds are characterized by higher security, whereas stocks with higher volatility the first can be used as a tool to balance the negative effects of the latter.
Best Stocks/Bonds Ratio
Many investors find it difficult to determine the proportion of stocks to bonds when constructing their investment portfolios. Most advisors recommend the following of a 70/30 to 60/40 ratio of bonds in an investment portfolio. Generally, the right stock/bond ratio is dependent on the risk aversion and aggressiveness of the particular investor. The more willing you are to take risks, the higher the proportion of stocks should be.
Additionally, if you are a very conservative investor that is completely averse to risk, you should consider the purchase of US Treasury bonds because they are guaranteed by the US Government. However, don't put all of your bonds in treasuries since they provide relatively meager yields. Think of other types of bonds that have higher yields.
In case you are nearing your retirement years, you should apply a more conservative approach toward your investment portfolio. Thus, the ratio of bonds to stocks should be increased in favor of bonds. This is so, since bonds are more secure and since your goal will be to preserve your income, bonds should outnumber stocks. Yet, the latter should not be excluded at all since they provide a useful tool to respond to inflation.
Bond Investment Options
One of the options you have available in case you have more money to invest is municipal bonds, whose returns are freed from taxes. Since they are issued in high denominations, they are not suitable for small investors. Another alternative within which munis are available are mutual funds. However, you should see the types of munis the mutual fund trades with.
If you are looking for a professional management of your bonds, or liquidity and low initial investment, bond funds are the investment solution you are searching for. Some bond funds provide pre-set dates at which the bonds mature.
The advantage of bond funds over mutual funds is that the first guarantees you a certain amount of money at the date of maturity, which cannot be done with the latter. So, if you want to have a certain amount of money at a certain point in the future, bond funds guarantee you the availability of this money at the pre-determined date.
Finally, you can include corporate bonds especially the ones that enjoy high rating. They may be difficult to find, but this problem can be solved through the participation in a mutual fund that offers them to its investors.
Whatever your preference of bond investment is, always consider bonds as an obligatory part of your investment portfolio. You should not be discourage by the relative difficulty of purchasing certain types of binds, but do your best to balance your investment portfolio regarding the potential market volatilities you are exposed to.
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