Bonds That Belong in Every Portfolio: 3 Versatile Picks for Stability and Income

In This Article:

In the world of investing, portfolio diversity is one of the most important aspects of long-term stability and growth. The reason? No one stock, industry, or opportunity is free of risk. However, careful distribution of cash across different investing opportunities can help hedge against some of this risk. One of the more stable investing methods can be the purchase of bonds. While that may induce some yawns, there are bonds for every portfolio strategy.

In the case of bonds, the investor chooses to become a lender, ultimately collecting interest on the loan he or she provides. Typically, the safest bonds a retail investor can purchase are those issued by the U.S. Treasury, as they are always paid back to the investor on time and to the agreed interest adjustment. Moreover, since the U.S. government can always levy increased taxes to pay its debts, a default on the investor’s loan is exceptionally unlikely.

Treasury Inflation-Protected Securities (TIPS)

Inflation written on dice with red arrows going up. Inflation. best inflation stocks
Inflation written on dice with red arrows going up. Inflation. best inflation stocks

Source: stockwerk-fotodesign / Shutterstock

When looking at bonds as a long-term investment, one of the first concerns for investors is the impact of inflation on their returns. Since bonds take time to mature and return a yield, they are subject to the fluctuating value of fiat currency. In other words, providing the government a loan of your own money, only to get back a 4% yield during times of double-digit inflation can seem pointless.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

This is where Treasury Inflation-Protected Securities, known as TIPS, come into play. Though their interest rates are low, these types of bonds provide a layer of inflation security like no other investment can. That’s because these types of bonds do not have a fixed principal on which interest accrues. Rather, the government, which is borrowing money from you, must adjust the original principal of the money you loaned them and continually pay interest on that amount as it inflates or deflates with the relative value of the dollar.

TIPS are now issued only electronically, which means no paper bonds and have maturity terms of five, 10, or 30 years. The interest rate is always above 0.125% on TIPS and is selected at the time of the auction with interest being paid to the bondholder every six months.

Floating Rate Notes

stocks to buy
stocks to buy

Source: create jobs 51 / Shutterstock.com

For investors looking for a more short-term bond play, floating rate notes are essentially debt instruments that allow the lender’s investment to become more lucrative as interest rates go up. Since the notes only take two years to mature, investors can more accurately time their buying and return schedule based on the current benchmark interest rate.

Waiting for permission
Allow microphone access to enable voice search

Try again.