Understanding Investing

Putting Bonds to Work

The basics of bond investing and the potential benefits.

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Narrator: Your money at work. Insights that can help you build a more secure future. Brought to you by PIMCO.

People invest for many reasons. No matter what your personal financial goals may be, to reach them, you need to make sure your money is working hard and working smart. But with today’s complex global markets and so many investment choices available, it can be hard to decide what’s right for you. Understanding a few basic concepts can help you make more informed decisions about investing. This video will help you get started.

Putting Bonds to Work. There are different types of investments, and each has its own purpose and potential benefits. Take bonds, for example. Bonds can play an important role in most investment portfolios, providing the potential for income, diversification, price appreciation, and steadier returns when compared to stocks. Bonds are issued by governments and companies to raise capital. For example, a government may issue bonds to pay for a new school. When you buy a bond, you are lending money to the issuer, who agrees to pay it back at a specific time, and in most cases, to make regular interest payments along the way. The global bond market is huge.

Bonds are issued by governments all around the world and by companies in every industry sector. When you hear bonds, you may think of U.S. Treasury Bonds, but they only account for about 13% of the worldwide total. Today’s global bond market is valued at more than 90 trillion dollars. This diverse market includes bonds that mature over a range of time periods and offer a wide range of interest rates. Bonds with higher risk tend to compensate investors with higher interest rates.

Are bonds right for you? The answer will depend on your investment goals. Some investors choose bonds for their income potential. Many bonds make regular payments, and investors can reinvest that money to help grow their principal or receive it as income. You may also choose bonds if you want the chance for your investment to grow, given a bond’s potential for price appreciation. It is important to remember, however, that just like any investment, there is also the chance that prices will fall.

 Many people also invest in bonds because they offer steadier returns than stocks. This can help reduce big swings in your portfolio and preserve your assets. Consider that in their worst calendar year since 1989, stocks fell 38%, while bonds fell less than 3% in their worst year. Bonds can help diversify your portfolio. Bonds are often considered a good compliment to stocks, because stock and bond prices often move in different directions. Diversification can reduce overall risk and help preserve your assets, though it does not insure against loss.

If investing in bonds seems like a good idea, how do you go about it? You can purchase individual bonds on your own, but for many people, a mutual fund that invests in bonds may make more sense. In a bond fund, a professional portfolio manager will search for opportunities across markets, research, and select bonds on your behalf. Bond funds also give you access to a wider range of bonds, providing an opportunity to increase return potential and diversify risk. A bond fund that invests in a broad selection of bonds can provide a solid foundation for your portfolio. This type of bond fund offers the potential for income, capital appreciation, steadier returns, and diversification.

Helping your money work harder and smarter while you achieve your financial goals.

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