In this video, we will look into bonds. What are bonds? What are the benefits of investing in bonds? And whether you should be investing in bonds or not. Enjoy!
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0:00 – Introduction
0:38 – What Is A Bond?
Whenever you borrow money from the bank, you are the borrower, and the bank is the lender, that money which the bank lent to you is known as a bank loan. But when the bank is the borrower, and you are the lender, that money which you lent to the bank, is now called a bond.
In return for lending them money, the borrower will give the lender a fixed amount of interest every year. When the bond matures, the money will be returned back to the lender.
2:05 – Benefits Of Investing In A Bond
1. Fixed Income
By investing in bonds, you will know exactly how much you will be getting, and when you will be paid. Company dividends can go up and down, but bond interest rates do not fluctuate.
2. Lower Risk
Whatever money you invested in bonds, that money will be returned back in full to you when the bond matures. However, even though bonds guarantee that you’ll get back your money when it matures, here’s a small foot note, you will only get back your money if the company hasn’t gone bankrupt. This has happened before to Hyflux investors.
However, there’s a very easy to avoid the risk of company going bankrupt, and that’s by looking at the bond rating.
3. Clear Ratings
Bonds are rated by international credit rating agencies. It will say whether it’s a good bond, or bad bond. Even though some bonds doesn’t have a rating, there’s a super easy way to check whether it is a good bond or not, that’s by looking at their interest rate, ie the lower the returns, the lower the risk; the higher the returns, the higher the risk.
5:17 – Should You Invest In A Bond?
In any investment, you always have to choose between two things, do you want stability or do you want growth? If you are the kind that prefers stability, and do not want to risk losing money. then you can go for bonds. A general guideline is that the older you are, the more bonds you should have in your portfolio, because your risk should be adjusted according to your age.
6:21 – My Thoughts
As of right now, I would not invest in bonds. A huge reason is because I’m living in Singapore, and in Singapore we have the CPF. At 65 years old when we retire, we will be paid a monthly income, which should be more than enough for us to live on based on a study by Singapore researchers.
With CPF acting as a bond by giving me a stable income, and with my investments giving me additional income, I don’t see a point to invest in bonds during retirement. But not everyone is in my situation, and not everyone can handle volatility during retirement, in that case, bond is a good consideration during retirement.
What about investing in bonds during retirement? With the market being so volatile, isn’t it better to invest in bonds?
A study by Vanguard looks at the effects of having different % of bonds vs stocks in the portfolio. If you have 100% bonds, your portfolio will be stable but it will have a lower return. But if you have 100% stocks, your portfolio will fluctuate wildly, but it will have a much higher returns.
So you do not need to invest in bonds just for the sake of stability. Because if you do so, you will be sacrificing a lot of returns for stability, which you might not even need in the first place.