When it comes to investing, "bonds" usually stand for "boring." But in today's upside-down economy, bonds provide not only a safe haven from the volatility of the stock market, but also the potential for attractive yields. Depending on where you live and the type of bond you buy, the income from your bonds may also be tax-free.
It's easy to see the appeal of fixed income securities in uncertain times like these. Unlike stocks, which gain or lose value depending on the company's financial performance and macro factors affecting the economy, a bond pays out a fixed income stream in good times and bad. Think of a bond as a loan that you make to a corporation or government entity. The investor (that's you) lends out the money for a certain period of time and pockets periodic interest payments plus the full principal amount when the bond matures.
It's a great way to generate positive cash flow while you're building your business and to tide you over until the economy recovers. You can also borrow against the value of your bonds at much lower rates than you'd pay a bank.
"Fixed income securities and investments have long been a staple of Fortune 500 corporate treasurers as a tool for investing excess cash," says Eric Eaton of Egyptian Builders Consulting Group LLC. "Fixed incomes can provide superior returns to generic bank money market accounts or bank certificates of deposit and are clearly superior to allowing cash to sit idly in checking accounts."
Like any other investment strategy, of course, investing in fixed income requires careful planning. Eaton suggests you develop a cash-flow forecast for your business to help you minimize your risks and maximize your returns. While you'll eventually recover your principal once the bond matures, the bond's price may fluctuate along the way, depending on factors like interest rates and how risky the market perceives other investments to be. If you think you may need to sell the bond before it matures to raise capital for your personal or business needs, you may want to consider a shorter-term bond with less potential for price fluctuation.
There are many ways to play the fixed income game, either by buying bonds directly or investing through mutual funds. As always, though, be sure to talk to your accountant and your money manager to find out which fixed income strategy is best for you.
The information contained herein is provided for informational purposes only and should not be relied upon in making investment decisions. Before investing, you should always consult with a licensed investment professional. Past performance of investments discussed in this column is not an indication or guarantee of future performance.
Rosalind Resnick is founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and small businesses, and author of Getting Rich Without Going Broke: How to Use Luck, Logic and Leverage to Build Your Own Successful Business. She can be reached firstname.lastname@example.org or through her website, abcbizhelp.com.