Bonds should be included in any investor’s portfolio as they act as shock absorbers during times of stock market volatility and economic instability.
With the continued instability of global economies, many retirees are looking for investment options that will provide them with some income security.
Bonds are taking center stage as attractive options for retirees, especially at a time when stock markets around the world are booming.
In recent discussions, retirees who have invested in real estate for their retirement income have now decided to use the proceeds from the sale of properties to invest in short and long-term bonds, as they seek stable income and reliable now and in the future.
How do bonds work?
A bond is a debt security issued by the government of a legal entity (the borrower) to the bondholder or investor. The issuer is required to pay interest and principal to the investor over a specified period. Interest can be paid monthly, quarterly and semi-annually. All bonds have maturity dates and are generally low risk instruments. They are less volatile and less risky than stocks.
Government bonds are relatively safe and are among the safest bonds on the market. Bondholders undertake to repay the principal, but investing in stocks offers no such guarantee. Bonds provide investors with stable and regular income until they mature. Also, interest rates on bonds tend to be higher than those on money market instruments, certificates of deposit and savings accounts.
In Jamaica, corporate bonds are in demand. These bonds are issued by well-performing companies and are relatively safe. Investors/retirees should ensure that they invest in bonds issued by companies with a proven performance track record. Bonds issued by junior companies usually offer very high interest rates and carry higher risk.
Interest earned on bonds provides steady streams of income to investors to supplement their salaries or retirement income. Interest payments can also be reinvested to provide future income to investors. Interest payments can be used for mortgage payments and other recurring expenses.
Understanding Bond Risks
Since most bonds offer a fixed interest rate, bonds become more attractive to investors when market interest rates fall. When market rates rise, bondholders will find bonds less attractive. This is called interest rate risk. Other risks are associated with bonds, such as liquidity risk, default risk and inflation risk.
Liquidity risk affects the investor if he decides to sell the bond before the maturity date. The speed with which the bond can be sold and converted into cash is called liquidity. Default risk arises when the issuer is unable to repay principal and make interest payments as agreed. When the interest rate on bonds does not keep pace with inflation, it is called inflation risk. An investor or retiree who chooses to invest in bonds should therefore seek the assistance of an experienced and qualified financial adviser to help them make the best decision that will meet the investment objectives of the investor or retiree. .
Bonds should be included in any investor’s portfolio as they act as shock absorbers during times of stock market volatility and economic instability. Investors, and especially retirees who depend on a fixed income in retirement, are advised to avoid junk bonds. These are very risky bonds that offer very high yields and are issued by entities that need capital quickly. Since a retiree can spend more than 20 years in retirement, equities remain the engine of growth for retiree funds and offer better protection against inflation than bonds. However, retirees should never put all their funds in stocks because stocks are risky. Bonds can provide much-needed liquidity to retirees, both short-term and long-term. Retirees should consider bonds as the stabilizer of their investment portfolio.
Grace G McLean is a Financial Advisor at BPM Financial Limited. Contact: gmclean@bpmfinancial and visit the website: www.bpmfinancial.com. Grace is also a podcaster for Living Above Self.
Retirees should never invest all their funds in stocks, as stocks are risky, while bonds can provide much-needed cash for retirees.