Financial experts often advise investors to ‘not put all their eggs in one basket’ to emphasise the importance of asset allocation in any portfolio. These experts also advise investing in bonds to balance the risks from shares investment, but buying bonds without proper knowledge could also increase exposure to investment risks. Investors first need to equip themselves with basic knowledge about bonds.
The following Nest Egg articles would be useful in guiding investors through the process of bond investing:
Step one: Learn the basics
How does investing in bonds work gives the readers essential information they require in order to have a basic knowledge about bonds. The article gives beginner investors an idea of how debt security works, what returns on investment to expect and the biggest risks bonds face.
It also provides information about the types of bonds that are available in the market and instructions on how to get started with bond investing.
For instance, one section provides an example of what a bondholder can expect to earn from a $100 bond given a certain set of conditions. However, the values included are merely for illustration purposes and should not be taken as advice because the potential yield can vary even if they come across a bond with similar traits.
Step two: Selecting a bond
Once investors have expanded their knowledge about debt securities and bonds, they may select from any of the types identified in the previous article.
For those who are still unsure of which type of bond to invest in, many investment experts recommend government bonds. Investors who want to further decrease their exposure to risk may consider adding government-issued bonds to their portfolio since Australian Government Bonds (AGBs) have a proven track record of paying bondholders their dues.
AGBs normally cost a lot in their usual form, but retail investors may still gain access to them through the Australian Securities Exchange (ASX). How to invest in government bonds provides information on how to purchase Clearing House Electronic Subregister System (CHESS) depositary interests (CDIs)—which take exchange-traded treasury bonds (eTBs) and exchange-traded treasury indexed bonds (eTIBs) as underlying assets.
It also instructs investors on how to access bonds in the primary market if they have enough capital to place an acceptable bid of at least $1 million. Investors who plan to purchase CDIs in the secondary market are also taught on how to identify bonds among the various codes in ASX, as well as what the elements in the code mean.
Step three: Determine a strategy
Some investors are content with using buy-and-hold or passive strategies with their fixed-term investments, but others prefer employing tactics that could maximise their earnings by attempting to outperform the market.
Active bond management strategies lists the most common techniques that experienced investors employ with their bond portfolios.
Such strategies can include credit analysis, which requires fund managers to evaluate and purchase bonds issued by companies with low credit ratings only if they believe that the company and bond’s value will increase.
However, using active strategies to increase profit can open up a portfolio to greater risks. This is why experience fund managers practicing active bond management employ risk management strategies to ensure that loss could be avoided as soon as red flags pop up.
The articles above are meant to help investors further their financial education and should not be taken as financial advice. It is still best to consult a licensed professional who can take personal objectives and circumstances into consideration.