Government Bonds Investing – 7 Mistakes To Avoid!
All investments walk a line between potential returns and risks. A risk is the chance you will lose some of all of your money and a return is the money you make on an investment. To gain the higher return, you generally need to take a greater risk and those investments with lower risk have the lowest returns. Bonds are considered lower risk since the payout or yield is a function of the bond. Purchase bonds according to a coupon rate which is the annual interest rate the issuers pay the investor on a percentage of the bond’s face value. Government bonds investing ensures that your investment is backed by the US Federal Government and the government bonds interest rate is considered to have very little or no credit risk. The yields are therefore “safe.” As a note, the bond market is less volatile than the traditional stock market, and can be a secure hedge against inflation. You do need to be aware of the different mistakes that can be made in the bond market before investing. Check with your investment broker and understand the potentials for gains and losses.
1. Realize that a bond is actually a loan. You will have steady income from the interest paid on a bond, diversification, protection and potential tax benefits but its interest rate is dependent on the volatility of the treasury market.
2. Avoid taking too much risk. Investors look at yield figures when determining what government bonds investing to follow. Do not depend on yield figures based on payouts made in the past twelve months. Look at market conditions. If you are a retired investor and have a limited amount of funds available to invest, short term government bonds may be a better investment rather than higher risk long term bonds.
3. Although it can sound contradictory, not taking enough risk is a mistake made by young investors. Beginning investors have enough time to handle short-term losses. Government bonds investing need to include those bonds with higher future yields.
4. Avoid the appealing tax-free bonds. If you are in a middle income tax bracket you will find that taxable bonds offer a higher after tax yield. Read through municipal bond boards to find the correct investments and consult with both your tax advisor and investment professional.
5. Examine bond expenses. Bonds make money as per interest rates. Fees and costs included with bonds include issuance costs, the type of financing and the current interest rates.
6. Make sure you diversify your portfolio. Government bonds and specifically treasury bonds rates are dependent on economic growth and investor nervousness. Make sure your financial portfolio is diversified among a broad range of investments to reduce your risk.
7. Investing in government bonds should not include just chasing investments that performed well in the past. Long term government bonds historically have had the greatest returns in the long term, but past performance is no indicator of future returns. Look at the coupon rate rather than the maturity yield. For example if you have a bond with a $20,000 maturity value and a coupon value of 5%, you should receive $1000 every year until maturity. Bonds, however trade on the open market and the actual yield is different from the coupon rate. Focus on the yield you may actually receive instead of the coupon rate.
When investing in government bonds consult a professional. There are so many rules and regulations as well as possibilities between bond rates, coupon rates, maturity, and returns that can trip up the inexperienced investor. The best rule of thumb is always to invest according to your current economic status.