Asset Focus: Long-Term US Bonds
Following my previous post on short-term bonds, today I’m exploring the benefits of long-term bonds, and how they can be incorporated into your portfolio to promote diversity and boost your returns. especially for income investors.
What Are Long-Term Bonds?
Long-term bonds are simple debt securities. They are a promise to repay a loan over a fixed term, with a fixed monthly interest payment paid throughout the lifetime of the asset. Issued by a significant American corporation, long-term bonds generally mature after a decade or more.
How To Invest In Long-Term Bonds
Like all bonds, you can purchase a long-term bond from the borrower themselves, or go through a bank or broker and invest in a fund that owns the bond. There are mutual funds and exchange traded funds (ETFs) offering investors the opportunity to hold a diverse portfolio of professionally managed bond investments.
If you are sensible, you’ll be holding this asset for a decade or more to achieve the maximum return with minimal risk. As this should be seen as a long term investment, you’ll need to make sure that you find the perfect option for you, so shop around before you commit.
If you invest in the wrong asset, then you could be stuck with it for a decade or more, or have to pay a withdrawal penalty to remove your money before the asset fully matures.
What Are The Returns For Long-Term Bonds?
A long-term bond is a fixed-income asset that will bring in small interest payments every month, but over the lifetime of the bond you could earn a significant return. The best way to build wealth is through the power of compound interest. That means by holding investment that pay regular interest or dividends, and regularly reinvesting that income, you get interest in your interest. Very powerful!
You can see my ultimate list on monthly income investments here
The investment return to most long-term bonds in 202 is less than 2 per cent (2%). The price at which bonds are traded fluctuates as Federal interest rates go up and down. If rates go down, bond prices rise as investors seek out better yields. If interest rates go up, bond prices fall.
Because income form bonds is fixed, if you are paying less for the bond then your yield is higher. For example, If a bond coupon (the payment the bond makes to bonds holders) is $1, and the bond price is $100, then the yield is 1 per cent (1%). If interest rates go up and the bond price falls to $50, the coupon remains $1, and so the yield would be 2 per cent (2%).
The safest way to invest in bonds is to hold them for the full term. Then you don;t have to worry about price fluctuations.
If you’re investing in a bond through a broker or a bank, then you also need to consider the fees that they charge, as these will reduce the return that you earn.
What Are The Risks?
As noted above, bond prices are subject to some volatility due to fluctuations in Federal interest rates, As you could be holding the asset for a decade or more, and during that time, the market will definitely fluctuate.
For younger investors utilizing compound interest with bonds is a great way to build wealth. If you’re looking to retire in the next decade, then they could be the perfect way to earn a regular monthly income as part of a diversified portfolio.
If you’re keen to learn more about long-term bonds and how they could help you to achieve your financial goals, then here’s some further reading to help: