Many people underestimate the power of bond investments and think it is for lazy investors who are not ready to take risk. But the truth is that bond investments are heavily misunderstood, and in this article, we will give out 7 reasons why those with some money to spare should consider investing in bonds.
Safety and Security
Except for Greece, Spain and a few other countries teetering on the edge of bankruptcy, government bonds provide the safest and surest form of investment. Most of the world’s governments are fully solvent and so a trader can decide to purchase a government bond knowing fully well that he will get the returns on his investment paid in a timely manner. Even if the trader has lost the proof of his bond purchase (i.e. his bond certificate), it is still possible to trace the bond purchase and pay the trader his full entitlements as far as the bond investment is concerned.
Good Returns on Investment
If you are thinking of investing in a country like the US or Japan where interest rates are slightly above zero, this is simply not going to work in terms of returns. But if you live in a country with inflationary pressure and the central bank of that country maintains high interest rates, then investing in bonds will give you wonderful returns on investment. Take a country like Nigeria for instance, which offers an interest yield of 13% on its 30 day bond and 13.68% on the 364 day tenor. If you invested $5,000 on the 364 day bond, that would yield an interest of $6,840. This bond market easily outperforms any stock market in the US. Best of all, you can actually purchase this bond on the JP Morgan Index where it was just listed two weeks ago. There are other countries with high interest rates such as Ghana (15%), Belarus (30%), Venezuela (16%), Mongolia (13.25%) and Kenya (13%).
Predictability of Earnings
Bonds are one form of investment where there is predictability in the timing of payments as well as the amount to be earned in interest. As long as the credit rating of the bond issuer is ok and is a true reflection of the financial status of the issuer, the predictability of the earnings from bond investments will not be in doubt.
Relatively speaking, bond investments are not subject to as much taxation as many other forms of investments. For instance, investing in US Savings bonds qualifies the investor to receive exemptions from state income taxes.
Ease of Investment
It is easy to get started investing in bonds. There are no charts to analyze, no news reports to trade and no complicated methods of executing trades. To buy a bond, all you need to do is to get in touch with your bankers and they will handle all the complicated paperwork and processes for you. Bond investments can be done by the average Joe on the street.
Bonds represent an investment which has a safety profile that is suitable for those close to retirement. As people get older and closer to retirement, the window of opportunity for a recovery after a bad investment narrows, so the level of risk that they can safely assume is dramatically and irreversibly reduced. As such, they will need safer and more guaranteed investment vehicles to put whatever money that they have been able to save over the years. This is where a fixed and guaranteed income investment like bonds come in.
Creating a New Future
If your country has an issue with financing its budget, they may decide to float bonds in order to raise money to balance the budget. So by investing in your country’s bonds, you are indirectly contributing to the betterment of your own future. This may not seem so obvious, until you look at it in the context of this example. You live in a country which is looking at ways of expanding its housing market, and part of the plan is to build rail lines through which cement and other building materials can be transported from the point of production to the point of sale at a much cheaper price than is done using the current method, which is by road transport. Your government decides to float a bond to finance this project. When you and several thousands or millions of citizens purchase this bond, your government will have the funds for the project, building materials can be transported at cheaper prices, and you will be able to build your new house at cheaper prices. So indirectly, your bond purchase has helped create a better future for you and other citizens.