A bond portfolio is a collection of bonds that an investor holds. Bonds are instruments issued by a government or corporation to raise capital. You effectively lend money to the issuer when you invest in a bond. The issuer accepts paying you interest payments (coupons) and paying the loan’s principal amount at maturity. Bonds can be an essential part of a diversified investment portfolio as they tend to exhibit low volatility and provide regular income payments.
You can include several different types of bonds in your portfolio. The most common type is the government bond, which a national government issues. Government bonds tend to be very stable and offer relatively low-risk returns. Corporate bonds are issued by companies and tend to be more volatile than government bonds. Companies with poor credit ratings issue high-yield or junk bonds and offer higher yields for the increased risk.
Decide on your investment goals
The first step in putting together a bond portfolio is to decide your investment goals. If you are retired or close to retirement, you may be looking for stability and income. You would likely want to allocate a more significant portion of your portfolio to government bonds. In contrast, if you are younger and have a longer time horizon, you may take on more risk to accomplish higher returns. In this case, corporate bonds or high-yield bonds may be a good choice.
Determine your asset allocation
Once you have decided on your investment goals, you need to determine your asset allocation. This allocation is the percentage of your portfolio that you are willing to allocate to each asset class. For example, if you want to generate income, you may allocate 50% of your portfolio to bonds and the other 50% to dividend-paying stocks.
Select the proper bond funds
Suppose you are looking for stability and income. Government bond funds may be a good choice as they invest in various government bonds, including U.S. Treasury bonds, municipal bonds, and international government bonds.
If you are prepared to take on more risk in exchange for higher returns, corporate bond funds or high-yield bond funds may be a good choice as they invest in various corporate bonds, including investment-grade bonds and junk bonds. High-yield bond funds invest primarily in junk bonds.
Consider your investment timeline
When investing in bonds, it’s essential to consider your investment timeline. Bonds typically have a fixed maturity date, when the bond will mature, and the issuer will repay you.
You may want to invest in bonds with shorter maturities if you are close to retirement. In contrast, if you have a longer time horizon, you may want to invest in bonds with longer maturities as they typically offer higher yields.
Determine your risk tolerance
Another important consideration when investing in bonds is your risk tolerance. Bonds are typically deemed less risky than stocks, but some risk is still involved. Government bonds tend to be the least risky type of bond, followed by corporate and high-yield bonds.
Decide on an investment strategy
You can use many different strategies when investing in bonds, including laddering, barbelling, and bullet investing.
Laddering is when you invest in bonds with various maturities, benefiting from the higher yields offered by longer maturities while still having the stability of shorter-term bonds.
Barbelling is a strategy in which you invest in government bonds and corporate bonds, allowing you to benefit from the stability of government bonds while still having exposure to the higher yields offered by corporate bonds.
Bullet investing is a strategy in which you invest all of your money in one bond, which can be a good choice if you have a specific bond that you are interested in and comfortable with the risk involved.
Review and rebalance your portfolio regularly
Once you have selected the proper bond funds and implemented an investment strategy, it’s essential to review your portfolio regularly, ensuring that your investments align with your goals and risk tolerance. You may need to readjust your portfolio if your asset allocation changes.