How Much Should I Invest in Bond Trading?
A fact about bonds is that although they carry very low levels of risk, their rate of return is low compared to other more volatile investment assets, such as stocks.
This means allocating your entire portfolio to bonds will lead to a very low rate of return. It is best to diversify your portfolio and include a variety of assets.
So how much exactly should you allocate to bonds?
There is no one-size-fits-all approach. A number of factors will influence the amount of money to invest in bonds:
- Your age
- Your experience as an investor
- Your risk appetite
- Your investment philosophy
Here is a guideline to help with your decision.
Consider the Time to Retirement
Through the magic of compounding, you can grow your wealth using bonds depending on how much time you have until retirement. For instance, if you invest $200 in a bond that attracts 9% per year, after one year you will have $218. If it remains untouched, you will have $237.6 by the second year, and so on.
Compounding will be of benefit if you are younger. This is because you have the time to allow a small amount to grow over several years. You can invest less in bonds and commit more of your capital to riskier but high-yielding assets like stocks.
As you approach retirement, you will want to commit more to the safety of bonds, and based on the rate of return, you will get a consistent income.
Here is a guide:
- In your thirties, commit 10% to 20%
- In your forties, commit 20% to 30%
- In your fifties, commit 30% to 40%
- In your sixties, commit 40% to 50%
- Sixties and above (post-retirement), 60% to 70%
Check Your Investment Goals
Although investment is a long-term strategy and you cannot expect major results in weeks or months, every investor has different goals. Some are more aggressive, aiming to make high returns at the cost of taking a higher risk. Others are more interested in preserving capital.
If you fall under the most aggressive type and hope to make a high long-term return of 8% or more from your portfolio, allocate about 20% to bonds and the rest to investment assets like stocks. There are times when the value of your portfolio will drop, but it will then recover over the long-term.
When looking for a moderate long term return of about 7%, you can allocate about 40% to bonds and 60% to stocks and other high-yielding investment assets. This portfolio will also have periods where the value will drop and others where it recovers.
If you aim to preserve capital, more than 50% should go to bonds.
Consider Day Bond Trading
With this one, you don’t have to wait for ages before you earn an income. You can be trading daily and earn even in minutes.
These numbers are only a guide. You should consider your goals, risk appetite, and age when investing in bonds. As you approach retirement, your portfolio should lean on the safer side with bonds.
Continue doing your research on the companies and institutions you invest in to know when to rebalance and make changes to the portfolio so that it does not exceed the level of risk you can take.