Smart Bond Investing—Smart Bond Strategies
Buying bonds can be an important part of an asset-allocation strategy that balances risk and reward. Asset allocation is all about diversification of investments, both within and among different asset classes. In short, it means not putting all of your eggs into one basket.
In putting together a diversified portfolio, you select a mix of stocks, bonds and cash so as to arrive at the risk-reward ratio that stands the best chance of reaching your investment objectives. In general, the longer you have to invest, the greater risk you can assume because you might have the opportunity to ride out short-term market losses in hopes of achieving greater long-term returns.But investing always involves some degree of risk—and risk comes in many flavors: inflation risk, liquidity risk, market risk and so forth.
Remember that your risk analysis will always be unique to you. If you have limited assets or assets that you cannot or are not willing to lose, then you will want to think twice about the risks you take—especially risks that could result in your losing your principal or seeing the value of your investment eroded by inflation.
At least once a year, you should evaluate your portfolio with an eye to rebalancing your mix of stocks, bonds and cash to maintain the percentages you're comfortable with. For example, if bonds have dramatically outperformed stocks in recent years, you might want to rebalance your portfolio by moving some of your assets (or investing new money) into stocks.
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