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Investing 101: What You Need to Know About Bonds

Investing in bonds is one way to make more money and increase your asset portfolio. Before you put your money on it, however, you should know the basics in bonds investment.

Bonds let you take the upper hand in the lending department. When you invest in it, you are actually lending money to companies and governments for a certain period of time, so they can fund their daily operations. This makes you the lender. When these fancy IOUs are paid, you get the entire loan amount back plus interests.

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Between bonds and stocks, the former performs much better. There might have been a period, about 1870 to 1940, when both investment products were even, but not anymore. Bonds just keep on outperforming stocks, with the most recent one that happened in 2011.

But like most things in finance, expect to lose money in bonds as well. They may be a form of fixed-income investment, but the returns fluctuate just as everything else. The good news is, when interest rates fall, prices of bond rise. If you’re investing for short-term, this could spell good news. But it is best that you hold a bond to maturity.

Other things you should keep in mind are the following:

Diversify your portfolio

Bonds may be a great investing opportunity, but you should not invest all your money on it. The value of its fixed interest payments could not withstand inflation. So make sure to mix it with stocks, as they can better outpace inflation.

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Go for tax-free bonds

Obviously, if bonds are taxable, your net income would be lesser after taxes. This is especially true if you are in the 28% or higher in the federal tax bracket. So make sure to invest in tax-exempt bonds.

Most importantly, stick with short to medium terms if you want a steady income when investing in bonds.

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