Without knowing your portfolio allocation and risk appetite, I'm going to assume that you're a relatively conservative investor looking to protect your capital (or principal) while earning a bit of dough.
How To Invest In Bonds
There're tonnes of things to look out for when investing in bonds. But for the sake of simplicity, I'll focus on one thing today.
When you invest in bonds, whether long or short term, you should always adhere to the general rule of diversification.
Similar to almost all other forms of investment, it's never a good idea to put all your eggs (assets and risk) in one basket (single asset class).
Even with bonds, you'll want to diversify (and lower) the risk by creating a portfolio of several bonds. Each bond should preferably come from:
1) Different Issuers
In the off chance any issuer is unable to pay the interest and worse, your principal.
2) Different Types
Consider different types like government, corporate, municipal, etc as well as from different market sectors creates protection from the possibility of losses from any one sector
3) Different Maturities
This helps you to manage interest risks.
You might be wondering, "Simi interest risks?!"
Bond prices are usually reflective of the prevailing market interest rate. As interest rates rise, bond prices fall because the opportunity cost (read: cost of missing investments of potentially greater value) becomes higher. The same applies vice versa.
This is what I mean in simple-r English:
Let's assume that you bought a 5-year bond with a 2% coupon that costs $200.
You collect your 2% coupon for 2 years and are happy.
President Trump decides to announce some harebrained US Federal Reserve monetary policy that hikes interest rates from 2% to 4%.
Suddenly, your 2% coupon is rubbish and you have difficulty selling your bond now because newer bond offerings have better coupon rates of 4%.
The low demand will also trigger lower prices on the secondary market. So if you want to sell your 2% coupon 5-year bond to buy another bond with a higher coupon rate, you're going to have to sell it at a discount.
Of course, this all applies only if you wish to sell. If you continued holding onto the bond and collecting the 2% coupon, you'll still be getting money. Just not as much as you'd like...
But thankfully interest rate hikes don't last forever (*knocks on wood), so if you have a good mix of bonds with different maturities, you can ride out these hikes and drops without breaking too much of a sweat.
Bonus: What Bond Should I Pick If I'm A Noob?
If you're a complete noob, you can probably start by looking at something like Singapore Savings Bonds (SSBs) as:
- the minimum amount to invest is $500
- there's no penalty for early redemption
- it returns more than 1% per annum
- it's fully backed by the Singapore government (read: safe-r)
If you'd like to read more about it, Seedly has a pretty detailed article on SSBs: https://blog.seedly.sg/guide-investing-singapor...
Without knowing your portfolio allocation and risk appetite, I'm going to assume that you're a relatively conservative investor looking to protect your capital (or principal) while earning a bit of dough.
How To Invest In Bonds
There're tonnes of things to look out for when investing in bonds. But for the sake of simplicity, I'll focus on one thing today.
When you invest in bonds, whether long or short term, you should always adhere to the general rule of diversification.
Similar to almost all other forms of investment, it's never a good idea to put all your eggs (assets and risk) in one basket (single asset class).
Even with bonds, you'll want to diversify (and lower) the risk by creating a portfolio of several bonds. Each bond should preferably come from:
1) Different Issuers
In the off chance any issuer is unable to pay the interest and worse, your principal.
2) Different Types
Consider different types like government, corporate, municipal, etc as well as from different market sectors creates protection from the possibility of losses from any one sector
3) Different Maturities
This helps you to manage interest risks.
You might be wondering, "Simi interest risks?!"
Bond prices are usually reflective of the prevailing market interest rate. As interest rates rise, bond prices fall because the opportunity cost (read: cost of missing investments of potentially greater value) becomes higher. The same applies vice versa.
This is what I mean in simple-r English:
Let's assume that you bought a 5-year bond with a 2% coupon that costs $200.
You collect your 2% coupon for 2 years and are happy.
President Trump decides to announce some harebrained US Federal Reserve monetary policy that hikes interest rates from 2% to 4%.
Suddenly, your 2% coupon is rubbish and you have difficulty selling your bond now because newer bond offerings have better coupon rates of 4%.
The low demand will also trigger lower prices on the secondary market. So if you want to sell your 2% coupon 5-year bond to buy another bond with a higher coupon rate, you're going to have to sell it at a discount.
Of course, this all applies only if you wish to sell. If you continued holding onto the bond and collecting the 2% coupon, you'll still be getting money. Just not as much as you'd like...
But thankfully interest rate hikes don't last forever (*knocks on wood), so if you have a good mix of bonds with different maturities, you can ride out these hikes and drops without breaking too much of a sweat.
Bonus: What Bond Should I Pick If I'm A Noob?
If you're a complete noob, you can probably start by looking at something like Singapore Savings Bonds (SSBs) as:
If you'd like to read more about it, Seedly has a pretty detailed article on SSBs: https://blog.seedly.sg/guide-investing-singapor...