Do you love playing the stock market but you’ve realized that things aren’t going your way? Instead of giving up your dreams of a better lifestyle, consider switching up your investment strategy. Most investors love the stock market because that’s where the money’s at – most of the time. The problem is, stocks are not a sure thing. You can make or lose money very quickly. For a lucky few who know how to work the system, it’s a good thing. But, for most of us, it can lead to financial ruin.
The majority of investors will need something else in their portfolios to meet their shorter-term goals and to minimize the risk involved with the financial markets. If you are one of these investors, consider adding bonds to your portfolio. They will help you counterbalance the stock exposure. You can buy and sell individual bonds through most brokers. But, they aren’t for everyone. Bond funds are a nice option as well. In fact, most investors prefer them over individual bonds because, by their very nature, they increase your portfolio’s level of diversity. Because of the sheer number of bond funds, it’s hard to decide which ones to pick. To help you in this endeavor, we submit the following information:
What is a bond?
To put it simply, bonds are investments tied to loans between an issuer and purchaser. The purchaser pays a specific amount of money, usually between $1-5,000 per bond, to the issuer. The bond’s maturity date is set before it’s issued. In this way, investors are fully aware of when they will get their money back. The issuer can use this money in any number of ways. But, there is a catch. He or she must pay interest to the bondholder, usually twice a year, until the bond reaches maturity. There are several types of bonds. Some of them include:
- Short, intermediate, and long-term bonds: – Dependent on the amount of time it takes for the bonds to mature Treasury corporate and municipal bonds: Issued by private businesses, a local or state government entities, or the Federal government
- Investment-grade and high-yield bonds: – Dependent on the issuer’s ability to repay the bond when it matures. Generally, the greater the risk involved, the better the returns Bond funds explained Bond funds are investment pools in which a variety of investors contribute money towards a shared portfolio of bonds.
The two most common types of bond funds are:
- Exchange-traded funds: You can buy these at any time, as long as the stock exchanges are open for trading. Furthermore, the price is determined by the market price. In turn, this is determined by the number of money buyers are willing to pay and the amount that sellers are willing to accept.
- Mutual funds: These can only be purchased at the end of the trading day. Furthermore, they can redeem existing shares or issue new shares at will.
No matter what happens, you’ll always get the net asset value of all the investments in the fund. No matter what type of bond fund you choose, it will give you the opportunity to invest in a highly diversified portfolio for a relatively low-cost. Which bond funds should you pick? The best bond funds will meet the following criteria:
- Low expense ratios
- Manages many assets
- Produces higher-income yields than other similar bond funds
- Investment goals match up to your needs
- Has appealing special features
Now, that would have gotten that out of the way, it’s time to get down to business. We understand that making the right choice is a daunting decision but, in our humble opinion, the top 5 bond funds are as follows:
- iShares TIPS Bond (NYSEMKT:TIP)
- Vanguard Short-Term Bond (NYSEMKT:BSV)
- Vanguard Total Bond Market (NASDAQ:BND)
- iShares iBoxx Investment Grade Corporate Bond (NYSEMKT:LQD)
- iShares Core U.S. Aggregate Bond (NYSEMKT:AGG)
There are several reasons to pick these particular ETFs. Some of these include: Will give you broad exposure to a variety of popular bonds Low expense ratios Attractive yields Bond funds are a very useful option for those looking for an investment portfolio that minimizes the risk associated with stocks. If this is you, the five ETF listed above will help you get your feet wet in the bond market. Good luck!