Adding bond funds to your portfolio

An investment fund is a financial vehicle that pools money contributed by a group of individuals to invest in different types of assets. There are numerous investment funds and numerous ways to classify them, however they are most often categorised according to the type of asset in which they invest. A bond fund, as the name suggests, is a fund invested primarily in bonds and other debt instruments. This particular type of fund may be a good addition to the portfolio of medium to long-term investors.

To sell or not to sell - that is the question

Interest rates are low and have been for quite some time, so it may be hard to remember a time when you could buy an investment grade bond with a coupon of 8.0 percent, but that was once the reality.

Assessing the risk of default

Every investment has a probability of default – it has quantitative and qualitative components. If you are buying a bond – your first concern is usually quantitative “can this company or Government afford to repay me?”. In the case of a company – is it cash flow positive, is it solvent, what are the other and upcoming debt obligations, what is the financial and strategic position of the company? In the case of a government – how large are their deficits, how are the deficits being financed, what is happening to macroeconomic policy? Among a myriad of many other questions.

A deeper look at credit spreads

In an earlier article this year, I remarked that the paradox of bond prices rising as interest rates rise could be explained by falling credit spreads. So, today I want to delve a little bit more into the usefulness of credit spreads and their importance to bond investors.

What is a credit spread?

Investing my windfall

Everyone’s journey in life is different. We take different paths to achieving our goals and some paths may be more difficult than others. However, planning and preparation can help us to achieve our goals. A common goal shared among most, if not all people, is that of financial freedom. We all want to be able to live comfortably and afford the things that are important to us.

Emotional investing

It is often quoted, “An investors worst enemy is not the market but his or her own emotions”. There are numerous theories which attempt to explain how investors react to regret or overreact when buying or selling their investments. Many times, their reasoning is based on the level of stress which leads to fear and excitement. This in turn leads to chasing performance and not diversifying, switching in and out of investments often at the wrong time, and feeling misplaced loyalty to a company, country, or region.

The most common signs of emotional investing.

Bond laddering for predictable cash flow

A popular investment strategy for an investor seeking a predictable cash flow is bond laddering. Bond laddering is in essence building a portfolio of bonds with staggered maturity dates. For example, the portfolio can consist of bonds maturing in three, five, seven and ten years. You can think of each bond’s maturity as a different rung on the ladder.

Is volatility always a bad thing

There are always things happening to unnerve markets and cause volatility, from changes in commerce, to politics, to economic outcomes and corporate actions. Volatility is an investment term for when a market or security experiences swings in either direction, up or down, that deviate from the norm. If the price stays relatively stable, the security has low volatility. A highly volatile security hits new highs and lows quickly, moves erratically, and has rapid increases and dramatic falls.

Returns at different risk levels

It's widely known that the return you earn is a function of the risk you take. Higher risk equals higher return. Lower risk equals lower return. But what is high and what is low? How do we determine a high return vs. A low return? That is heavily influenced by prevailing market conditions.

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