What are the pros and cons of bonds?
A bond is one of the options available for investors that they can use to grow wealth over time. Bonds are a fixed-income instrument, which is considered a loan made by the investor to the borrower. The borrower agrees to pay back the value of the investment plus a fixed rate of interest when the bond reaches its maturity date.
Pros of bonds
- Fixed return on investment (ROI) — One of the primary principals of a bond is that you receive a fixed rate of interest when the bond reaches maturity. You will be able to track exactly how much you can expect to return.
- Low risk — Bonds are less vulnerable to market volatility. Plus, institutions prioritize paying bondholders over shareholders in liquidation events.
- Clear ratings — Bonds are rated by credit rating agencies that provide investors with a degree of insurance when looking for bonds to invest in.
Cons of bonds
- Limited gains — Earnings from bonds are limited to the fixed interest rate that was determined at the time of purchase. If a company experiences exponential growth, bondholders will not share in the higher potential gains.
- Large investment requirements — Many bonds require large amounts for a minimum investment. These large amounts may be out of reach for newer investors or investors without much capital to spare.
- Lower liquidity — Bonds issued by smaller, less stable companies may have less liquidity than stocks or bonds from major corporations or the U.S. Treasury. This means that they will be more difficult to sell in the event that you wish to sell them.
- Rising interest rates — Rising interest rates can affect bondholders who are interested in selling bonds for a profit. Bondholders who plan on holding to maturity do not have to worry about this as much.
Talk to a ProVise CFP® professional about the pros and cons of bonds
At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about the pros and cons of bonds? Contact ProVise today to schedule a complimentary consultation.