Fitting Short Term Bonds into Your Portfolio

Fitting short term bonds into your portfolio should be a priority for any investor. A well-balanced portfolio is going to have several different types of investments within it. Short term bonds are one of the better investments that you could have as part of your portfolio. Here are some things to consider about short term bonds.

Short Term Bond Basics

By purchasing a short term bond, you are essentially loaning your money to an entity for a certain period of time. They pay you a certain interest rate over a given period of time. Then at the end of the term, they pay the full amount that you loaned them back. You can get short term bonds from corporations, or from the federal government in the form of savings bonds. 

Safety

One of the biggest advantages of investing with short term bonds is the very low risk. For the most part, your investment is safe with a short term bond. At the beginning of the bond term, you know exactly the amount of interest that you are going to make over the life of the bond. The return on the bond is not subject to the highs and lows of the market. Even if the entire stock market is under-performing, your bond rate will remain unchanged. The only real risk that you have to worry about is if the company that you invest in goes bankrupt. However, even if they do file for bankruptcy, you will be at the front of the line to get your money back as a creditor to the company. With this form of investment, you know that your money is safe under most scenarios.

Specific Goals

When trying to save money for a specific goal or objective, short term bonds can be very beneficial. For example, let's say that you were investing to save money for a child's college expenses. If you invest your money into stocks, the money may or may not be there when you need to send them to school. With bonds, you know that the money will be there. You can plan exactly how long it will take to earn the interest that you need and you can plan accordingly. 

Low Returns

With the safety that short term bonds provide, you should not expect to earn much interest. They will provide you with a steady rate of interest, but it is going to be lower than what you could get through other investments. Therefore, this is for those that value a safe investment that slowly brings in returns. 

Part of a Portfolio

Using short term bonds as your only investment strategy is most likely not in your best interests. However, it is a good idea to make a certain percentage of your portfolio short term bonds. Having some returns that you can count on every year will help to steady your portfolio and provide a constant growth curve. Depending on your risk tolerance, you may want to keep 10 to 20 percent of your portfolio in the form of short term bonds. 

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