If you've been investing for any amount of time, you probably know that a diversified portfolio is vital to your chances of success. However, that advice, in and of itself, really doesn't do too much. Instead, you need to fully understand what it takes to diversify sufficiently your investments. One very smart way to do this is with bonds. These aren't some trendy option, but a resource that has always been central to creating a diversified portfolio.
Bonds Are Better than Cash Right Now
As most investors are well aware, interest rates are currently at a historical low. Nonetheless, they're still at a positive level here in the United States compared to the negative rates being seen throughout Europe and Japan.
One upshot of this is that five-year treasury bonds will pay out 1.5%. On top of that, corporate bonds will pay out 2% to 4%. That makes these bonds a better investment than actual cash.
Of course, if you have strong liquidity needs, cash makes a lot of sense. Otherwise, it's sitting with a near-zero-if not negative-rate which should make it pretty simple to see why bonds look so attractive to so many right now.
Historically, Bonds Have Always Been Important
Still, I'm not trying to make the point that bonds only recently became important to a successful portfolio. In fact, that's just one more reason to invest in bonds - they have always been an important ingredient in the recipe for investment success. On top of that, they've always been seen as one of the most stable, reliable and consistent investments you can find.
Rising Rates Will Bring on More Buying Opportunities
As you may have heard, the Federal Reserve recently announced that it would be hiking interest rates at least twice this year. There is no word on when they plan on doing this, but it shouldn't be happening any earlier than June. It might not even happen until September; We'll just have to wait and see.
However, it's important that you try to prepare for when these rates do go up. One big factor to take into consideration is that these rising rates will create more opportunities to buy. Take advantage of this and you could greatly improve your portfolio during these times.
For those of you who have more generous horizons, higher rates just mean that the future yield you receive from investing in bonds will be that much greater. This is another great reason to get excited about seeing these rates go up.
That's actually why rising rates are always a good thing for those who put their money into bonds. As long as you're an investor who can keep your long-term goals in mind, this type of environment works to your advantage.
While it's true that there is no such thing as a sure one when it comes to investing, having a diversified portfolio is a pretty good step in the right direction.
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Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in a loss. While bonds may provide an assurance of predictable return, there is a risk of default of particular issuer and there can be no assurance that an investment mix or any projected or actual performance will lead to the expected results shown or perform in any predictable manner.
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