The Good Side of Bonds

If you hold bonds until maturity, you can expect your investment to be reasonably predictable. If you invest in a reputable bond issuer, you can expect a fixed rate of interest on a regular basis, plus a lump sum (the original value of the bond) to be repaid to you when the bond matures.

2.Bonds can provide a stable income stream

Bonds are sometimes called "fixed interest investments". Most bonds pay a fixed rate of interest, and generate a stable and reliable income stream for the term of the bond.

The 'yield' (ie. the return) generated by bonds has often been greater than the interest generated by term deposits (ie. cash interest rates).

3.Bonds can be profitable

Historically, bonds have significantly outperformed cash investments, and only slightly under performed property investments. Long term bond returns are also well above the level of inflation.

The steady income stream generated by bond coupons also helps to keep the value of bonds relatively stable.

4.You can diversify your investment

There are many types of bonds in which you can invest - with varying terms and interest rates.

You can reduce the volatility of your investment portfolio by spreading your money across different types of bonds, and particularly across bonds with different terms (that is, bonds which mature at different times).

If you've ever visited a well established garden, you will understand the importance of this kind of diversification. Most beautiful gardens include a variety of complementary plantings: shrubs, flowers, trees and lawns. The plants in the garden will be in season at different times and for different lengths of time. Some will be evergreens and last for generations, others will be annuals that bloom only briefly but brilliantly. By diversifying a cross a number of different species, a clever gardener can keep a garden looking beautiful all year round.

The same principle applies to bonds. By investing in a variety of bonds, you are not relying on the performance of just one investment, nor leaving yourself exposed to a particular time and market when you have to replace your entire bond portfolio.

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