Investing in Bonds – is the Low Level of Risk Worth the Low Level of Income?

Ask any professional investment advisor about putting a safe or low risk portfolio together, and quite often, you'll hear about how investing in bonds is likely to make your portfolio a lot more stable than stocks or anything else. Do bonds really make your portfolio more stable than stocks? What about the investment professionals who believe that while bonds can be considered somewhat safe, that their safety potential is overly hyped?

Well, as usual, there is some truth to both sides of the story. Basically, how much you wish to side with bonds over stocks will depend on how large a buffer you have for when things go wrong, how old you are that you may suffer a few losses and still recover, how reliable a job you have, and so on. Before we go into the safety vs. risk debate about bonds and stocks, let's clear one thing up quite thoroughly – buying bonds through funds and buying individual bonds are two different things.

When you get into investing in bonds by getting in touch with a brokerage firm and asking them to put your money in bonds of some kind, you are pretty much guaranteed to get your interest payouts (unless whoever issues that bond goes out of business). When you buy an exchange traded fund or mutual fund that invests in bonds, these kind of behave like stocks. They are constantly traded, their prices change and so on. Since these are traded like regular stocks, you could be exposed to a certain amount of risk.

Now let's look at the pros and cons of investing in bonds, in general.

With bonds, everything happens to behave in a stable fashion. Their prices don't go up and down as much as they do with stocks. If you invest directly in them without going through a fund, you get monthly income. Since you have quite a bit of stability investing in bonds, it makes it easy for you to plan for your future. You will for instance, be able to plan your retirement income or the value of your Roth 401(k) plan with these.

There is a kind of inverse relationship that stocks and bonds usually hold. When stocks go up, bonds go down in value. And it works the same the other way around too. So if you are investing in stocks in main, bonds can give you a degree of insulation. But of course, investing in bonds gives you two kinds of profit – in interest and also in basic price. Your bonds may rise in value by the time you're ready to sell them.

Of course, stability always comes with smaller rewards. These days especially, the bond market gives you some unbelievably low rates of return. In fact, you make so little money on bonds these days, you actually lose money to inflation.

Historically, bond prices have always risen and never fallen. But experts believe that this can't go on forever. And they may be right.

Basically, no one can do well putting too much faith in bonds. But they are an admirable way to balance out the risk you have in your stock portfolio.