Like any other investment decision, setting a bond investment goal is critical to determining whether or not the investment is delivering the intended returns. You can also take it a step further by employing specific tried-and-true tactics that may help you achieve your objectives faster while reaping the benefits of a consistent income stream and low risk in this fixed-income investment area.
Here’s a list of some of the most commonly used investment strategies in bonds:
- Reinvestment strategy
What do you plan to do with the returns you make? You can either use it for pre-planned expenses or keep it for savings. However, if you don’t have any expenses or have sufficient savings, you can reinvest the profit you gain from the existing investments. This method helps in the preservation of wealth while also increasing the rate of return over time.
- The Barbell Strategy
With no intermediary bonds, the barbell method divides your investment amount evenly between short-term and long-term bonds. Long-term investments are in bonds with higher coupon rates, whereas short-term bonds allow for reinvestment in the event of a bond market slump. When interest rates are rising, this method is advantageous. The approach gives liquidity as well as the ability to respond to unexpected events.
- Bond Swap Strategy
When you sell one bond and instantly invest in another, this is known as a bond swap. It is frequently done when the value of the bond you’ve invested in has decreased, and another high-performing bond becomes available in the market. While you may lose a little amount of money when you sell the bond, the potential for big returns is considerably greater. Bond swaps are popular among professional bond investors who are well-versed in this market.
- Bullet Strategy
This strategy is designed for investors who prefer to take less stress related to their investments. It is the polar opposite of the barbell approach as it does not diversify assets between long and short-term securities. Instead, you put it all into a variety of ‘bullet bonds’ with the same maturity. Bullet bonds are a type of fixed-income investment that solely pays interest for the duration of the bond’s life, with principal repayment done in a lump sum at maturity.
The term ‘bullet’ refers to the fact that you receive your entire principal repayment in one go. This technique is designed for those who do not wish to engage in time-consuming investment practices. These securities do not have to be purchased at the same time. The sole stipulation is that they must reach maturity at the same time.
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