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Many investors have historically shown a tendency towards investing in bonds arguing that they are safer and less volatile than stocks and other investment options. However in the face of an ever changing economy, are bonds really a safe investment?
The nuts and bolts
So what are bonds? To put it simply, bonds are loans made by the public to companies or governments in order to raise capital. The company or government issues the bonds and then pays the lenders a fixed interest rate on the loan. There are many different types of bond, however government bonds are generally regarded as being the safest. Corporate bonds are loans made to companies and are typically thought to be riskier – hence the lender gets a higher rate of interest. High yield bonds are the riskiest of all owing to their lower credit ratings and have higher interest due to this risk factor.
Interest rates and inflation
Banking interest rates are currently very low, but this trend may change and rates rise. When this happens it spells problems for bondholders as the fixed interest rates paid by issuers to the lenders could be less than the prevailing interest rate. Inflation cuts the value of the fixed interest rates over time and if the fixed rate drops below that of the rate of inflation, the bond holder will actually lose money, despite receiving interest.
How to incorporate them
Bonds are however an excellent way to provide stability in an investment portfolio, but investing in bonds alone is not the best option. So how then do investors use the stable bond to its maximum earning potential?
The safest and most efficient way to invest money into bonds is to incorporate bonds as one of different asset classes in a multi asset portfolio. Bonds can offset the risk of other more volatile assets like equities and commodities. If bonds do run into trouble, the portfolio still grows because of the diversity of asset classes where others are performing well. Through its exclusive partnership with multi-award winning fund manager Bestinvest, Infinity offers client portfolios which protect against too much market volatility by spreading the investors wealth over many investments.
Bestinvest is a leader in the investment field and its exclusive partnership with Infinity means that expats in Asia are now able to take advantage their services. If you would like to know more about diversified investing, get in touch today.
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