How To Buy Bonds And Build A Portfolio

How To Buy Bonds And Build A Portfolio

If you have decided that bonds are the right investment for you, now your probably asking how to buy bonds. Typically bond transactions are quite similar to stock transactions. It has to go through a brokerage. There are two options that are available – standard brokerage or specialized bond brokerage. Bond brokers require a minimum deposit into an account to get it going. If you do not have a minimum sum, such as $5,000-$10,000, you might wish to purchase a bond fund instead of buying individual physical bonds.

How To Buy Bonds?

In certain areas, banks also act as brokerages. This is especially true if you wish to purchase government bonds. Of course, it is also possible to purchase government bond from government bodies.

Purchasing bonds through brokerages come at a commission cost. At some brokerages, this commission cost is included into the price of the bond, or the “marked up price”. To ensure that you do not get overcharged in commissions, you can always search up the price of the bond online and do a quick validation.
Alternatively, you can buy a bond fund, which is a specialized security that consists of bonds and debts. The industry in which the bond is involved with differs between fund to fund. A bond fund is designed to mirror the performance of certain bond indexes or bond price trend, you will need to do research on an array of other factors such as the long term track record of the fund, the investment philosophy of the fund manager, the costs involved with investing in a mutual fund as well as the macroeconomic trends. Typically when you make a purchase in a bond fund, you will have to pay the fund manager an annual or semi-annual management fee. Be sure to factor in these hidden costs in your evaluation of the fund.

Although investing in bond funds might complicate things a little more in terms of research, a great bond fund pick can save you countless hours of headache and yield you above market returns for a long time to come.

Building A Bond Portfolio

The ultimate long-term investment goal is to build a portfolio that is able to consistently beat market returns while hedging against market swings and volatilities. The quickest way to build a great portfolio with superior returns is by investing in stocks. However, if you are a retired investor or just want to take the back seat approach in investing, you will definitely need to consider the possibility of crafting a bonds portfolio, or a fixed-income portfolio.

In theory, not many people would want to craft a portfolio that is entirely made up of bonds. However, bonds can play a major role if you are looking to build a fixed income portfolio. A fixed income portfolio is one that will generate a good passive income due to dividends or interest payouts.

A good, and conservative fixed-income portfolio should consist of about 30%-40% in low risk bonds. Besides low risk bonds, stocks and equities should also play a big part in your strategies. However, the stocks that you want to invest in are probably not volatile ones such as high-tech, bio-tech etc. The stocks you want are big, stable companies that yield very high dividends. They should also be in an evergreen market, not cyclic, and be reasonable priced. Investing in stocks is certainly risky, which is why we want to mitigate this risk by placing most of our cash flow into low risk bonds.

Other things you might want to include in the portfolio can include “real estate investment trusts” or REITs. Land space is only going to get more and more expensive, and investing in real estate trusts is a great way to leverage this trend as well as nailing some high interest rates. Investing in real estate offers the investor an excellent way to diversify from financial and credit risks brought about by stocks and bonds. A typical portfolio consists of 10-15% of REITs.

Besides risk free bonds, you can also choose to purchase high-yield bonds

High-yield bonds have low credit rating but a much higher yield. Considering that you are taking a big risk in this investment, as in the chances of default are a lot higher, it should only form about 4-7% of your entire portfolio.

Leveraging bonds to build a fixed income portfolio can be an incredibly rewarding process because of the predictable, consistent revenue they generate. If you are conservative in nature and are thinking about investing for the long term, be sure to study this in more detail and you will be able to confidently reap the benefits of bond investment.

How To Buy and Sell An ETF

Buying exchange-traded funds is quite different than purchasing your standard mutual fund. ETFs can only be purchased via a broker and the process is similar to trading a stock. You can think of it as mutual fund that is traded like a stock. As with all stocks, you need to open up a broker account before you can actually start buying and selling ETFs. We will run through the breakdown of steps that help a new trader get started:

1. Find a broker

While you cannot personally buy a share of an ETF, you can find someone else to do it for you. This is the broker. To find a decent broker that is beneficial to your cause, you want to insure that it provides reasonable price rates. Look at various brokerages and compare the pricing; commission structure, maintenance fees and trading software fees are just some components you want to look at. It should also provide good customer service and a high quality trading platform. A broker that has good service will provide you with good advice and feedback. This is crucial in your development as a new investor/trader. If your looking for some top brokers in Canada, check out our article on the top discount brokers in Canada

2. Deposit money into your trading account

More often than not, you will be asked to deposit a set amount of money into the trading account of the broker before you are allowed to start trading. You should take some time to decide the optimal amount of money you want to invest or trade. Brokers usually have a minimum sum of money in which you need to put in, take this into consideration when choosing a broker.

3. Learning the trading platform

After you have secured a broker, you need to have trading platform/software that you use to communicate with the broker. Traditionally, this was done via telephone; a trader would call the broker and place orders over the phone. Today, this can be done immediately through trading platform software. There are many software solutions out there and once you have chosen one, familiarize yourself with it so that you will be adept at navigating through the various functions.

4. Placing the order

Since ETFs trade like stocks, the mechanics behind buying and selling a piece of ETF is similar. It usually involves market order and limit order. It is also important to note that ETFs can be bought on margin if you have maintained a margin account with your broker. This also means that for every trade you want to execute with your broker, you can borrow a certain percentage from the broker to buy the ETF. However, buying on margin is usually not encouraged for long term investment because of the high interest rates charged by the brokers. In intraday trading however, interest rates are not charged.