The Advantages Of Short Term Bonds

Posted on August 12, 2008
Filed Under Stock Market |

When it comes to bonds, you’ll be hard pressed to discover anyone who will convince active investors that there is a place for corporate bonds in their portfolio. There are definite benefits to bond investments that will assist in making skilled investors even more successful. At the end of the day, its all about capital preservation.

Bonds may not offer the kinds of returns that successful trading can, however, a smart trader will invariably have a portion of their portfolio in short term bonds. There are a couple of perfect reasons for this:

Don’t Spend It All In One Place
A skilled trader doesn’t utilize all of their investing capital when trading. This adds too much risk to their portfolio. By allocating a percentage of your portfolio invested in bonds, you are ensuring that your portfolio has money for when things don’t work out as planned.

The Benefits Of Short Term Bonds
The advantage of short term bonds is that if structured properly, you will always have a bit of extra cash at your disposal to take advantage of those unique times when going all out makes good sense.

Putting It Away For A Rainy Day
A skilled trader will always make sure that they are taking money off the table, and putting the money away. The mistake that many traders make is to increase the size of their position after each successful trade. Just because your investment went up $5000 doesnt mean you should increase your next position size by that same amount of money. This simply adds risk to your trading plan. Put the money away. You never know when a bear market will strike, setting up an excellent opportunity to buy or go short.

You’re Not Getting Any Younger
There is also a case to be made that as we get older, it makes sense for us to put some money away into something that is less risky. Bonds make a great place to sock your money away for retirement. A good rule of thumb to use is to subtract your age from 100. If you’re 25, then sock 25% of your money into bonds and 75% into stocks. This will ensure that you’re putting money away for when you need it (and that it will still be there).

Investing in bonds is very simple to do. Whether you decide to go for U.S. Savings Bonds, Treasury Bonds, Municipal Bonds or Corporate Bonds, they all work in the same fashion. As you can see, there is a wide variety to choose from. You can buy bonds electronically on the OTC market and find many large corporations who offer bonds. You’ll find that your online brokerage can offer bonds for sale over different periods of time.

Its a good idea to get to know more about bonds so you know the difference between a zero coupon bond and a floating rate bond. Visit us for a more in depth answer the question of “how do I invest in bonds“.

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The Advantages Of Short Term Bonds

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