Typically, younger investors buy more stock and fewer bonds than older investors. Bonds are a more conservative asset class than equities, and offer less risk as well as less potential for growth.
Five reasons to buy bonds
- They can help provide a steady flow of income from interest.
- You usually get your money back if you hold a bond until it matures.
- They can provide you with opportunities to make money by selling them at a higher price than you paid for them. Of course, you can lose money on your bond investments too, if you sell before they mature.
- You can lower your risk when you invest by having some of your money invested in bonds.
- Bonds may do well when other types of investments do not.
There are many different types of bonds to choose from, including bonds from different governments and industries, with different maturity dates and different interest rates. Investors often buy bonds that mature and pay interest on different dates. This is known as bond laddering. Laddering can help you reduce the impact of changing interest rates and make investing in bonds work better for you.
Three reasons to ladder your bonds
- You get access to cash at different times, cash that you can either use or reinvest.
- If interest rates rise over time, you will be able to buy some bonds later that pay higher rates.
- If interest rates fall, laddering helps reduce the risk that all your bonds will mature at a time when interest rates are low.
Tip: Some retirees ladder bonds as an alternative to buying an annuity. They set up their bond purchases to supply a regular flow of income. Of course, they'll spend more time tracking and keeping records of their investments than they would with an annuity, but they also retain more control over their money. For example, they could sell a bond early if they had a cash emergency. You can't get extra money for emergencies from an annuity.
Remember: Like any investment, bonds have risks
Laddering can help you reduce the effect of changing interest rates and make investing in bonds work better for you. You may want to work with an adviser to choose the right bonds for your investment portfolio.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.