WiserAdvisor – Blog

Main Menu

  • Main
  • Financial Advisor Guide
  • Financial Planning
  • Retirement Planning
  • Education Planning
  • Investment Management
  • More
    • Personal Finance
    • Estate Planning
logo
Header Banner

WiserAdvisor – Blog

  • Main
  • Financial Advisor Guide
  • Financial Planning
  • Retirement Planning
  • Education Planning
  • Investment Management
  • More
    • Personal Finance
    • Estate Planning
Financial Planning
Home›Financial Planning›What Makes Bonds A Great Hedge?

What Makes Bonds A Great Hedge?

By WiserAdvisor Insights
March 31, 2020
941
0
Share:
Bonds

Last Modified on April 3, 2020

With the recent coronavirus outbreak, there has been a continuous downturn in financial markets. The stocks are falling every day as the epidemic is making a stronger mark on the world. Investors are worried about the extreme negative trends in their portfolios, yet nothing can be done to prevent this situation. Dealing with such unexpected adversaries can be challenging. However, if you make mindful investments and keep pace with the prevailing trends, most risks can be avoided. 

Bonds are one such risk-free tool that helps you guard your investments against possible market risks. 

Table of Contents

  • What are bonds?
  • What makes bonds a great hedge?
    • 1. Bonds carry a lower risk as they are regulated by the government
    • 2. Bonds act as insurance to an investment portfolio
    • 3. Bonds are the least affected investment tools in cyclic market rotations
    • 4. The long-term upholding of bonds outshines market volatility
    • 5. Bonds are cost-effective
  • To sum it up

What are bonds?

Bonds, also known as treasury bonds, are securities that are predominantly issued and backed by the US government. Bonds act as an excellent hedge against the rising market volatility since they are fixed return securities that work on a pre-determined rate of interest. The US government issues treasury bonds every quarter and keeps regulating the interest rates as per market conditions.  Three main factors determine the price of bonds: 

  • The price quoted by the investors through an auction
  • The prevailing market conditions
  • The cost of other competing bonds in the market 

The final price of bonds is ascertained after considering all the factors mentioned above.

What makes bonds a great hedge?

Bonds have existed in the market for a long time. When the government seeks a loan or wishes to borrow money from citizens (investors), it issues securities in the form of bonds and certificates. mBonds are a more secure investment avenue as compared to other higher return generating instruments. Here are some notable reasons why bonds can be a go-to option for investors to guard their investment portfolio:

1. Bonds carry a lower risk as they are regulated by the government

The reason why people prefer investing in treasury bonds is that the government backs them. The investment risk in bonds is also nearly negligible as the majority of the investments made by bonds are in G-Secs. However, as a side effect, they offer a lower rate of return as compared to stocks and equities. Bonds aptly fit under the frame of ‘low risk and low return’ instruments.  As bonds are considered to be risk-free investments, their returns may not always be so attractive. But this helps investors stay put in all market conditions if they have made balanced investments along the due course.

Investors also need to consider the time-value when investing in bonds. Though bonds are risk free investments, there lies an inherent risk of being subdued by the rising market. When buying a bond, the general idea of every investor is to ensure wealth preservation and make sure that the investment is not a stagnant one. Investors expect decently moderate returns over their investments. When the markets are on an up-rise, other competing avenues generally outshine the treasury bonds failing the initial cost of investment and claiming away any profit that investors may have made.

2. Bonds act as insurance to an investment portfolio

Another huge advantage that bonds carry is that they insure investment portfolios against potential market risk. As a commonly accepted ratio, people invest nearly 60% of their money in stocks and equities and the remaining 40% in bonds and commodities. When the market is volatile, the 40% investment plays a major role in helping investors keep up with the turmoil.

Investing in bonds can offer assured returns to investors at a predetermined interest rate, irrespective of the prevailing market conditions. This function is quite similar to how insurance works. The ultimate goal of investing in bonds is to attain stability over the market crisis and get assured returns. 

3. Bonds are the least affected investment tools in cyclic market rotations

All investors know that financial markets work in cyclic movements. A bull market is followed by a bear market, which is then followed by a bull market again. The pattern remains the same. Although the duration of these market cycles cannot be predicted, one can be sure of how they impact investments. But in the case of bonds, market cycles are not very effective. Since there is a pre-determined return on investment in bonds, the market volatility is of minimal effect. 

4. The long-term upholding of bonds outshines market volatility

While investing in bonds, a lot of investors have come to acknowledge the fact that bonds outshine market volatility when held over a substantial period. Past trends of capital appreciation are a testimony to how bonds remain unaffected by market fluctuations. As per a report released by the BlackRock investment institute, there is a registered 95% success rate of bonds over other similar stock investments. The report also shows that bonds offer 4% better returns than stocks. 

5. Bonds are cost-effective

Of all the aspects, one primary concern that investors have while dealing with investments is the effective cost they have to pay. Bonds are an overall cost-effective investment avenue. This makes them an attractive tool for investors. Since bonds can be bought at a lower price depending upon the auction rates, the initial cost that investors pay is comparatively lower than stocks and equities. In addition to this, if investors find themselves at an interest rate risk, they can choose to sell off these bonds to balance out any negative returns.

To sum it up

Bonds are an effective way of hedging your portfolio against any potential loss. Since the return percentage is predetermined on bonds, there is only minimal risk associated with them. This provides high stability to the portfolio and offers insurance against any kind of market volatility. Bonds ensure protection against the inherent market risk in the case of stocks and equities. Therefore, it can be advantageous for investors to invest in bonds and other secured investment avenues to guard their portfolio against probable losses. 

However, these investment decisions can prove to be a tedious task if you are unaware of the basic rules and stipulations concerning bonds. You can reach out to financial advisors and leverage their professional knowledge on the topic before making any major investments decisions.

Tags#financial advisorBondsfinancial planningInvestmentPortfolio
Previous Article

What Counts as Compensation (Earnings) for IRA ...

Next Article

Wise Financial Decisions During the Coronavirus Pandemic

0
Shares
  • 0
  • +
  • 0
  • 0
  • 0
  • 0
WiserAdvisor Insights

WiserAdvisor Insights

A team of dedicated writers, editors and finance specialists sharing their insights, expertise and industry knowledge to help individuals live their best financial life and reach their personal financial goals. We believe that there is no place for fear in anyone's financial future and that each individual should have easy access to credible financial advice.

Related articles More from author

  • Estate-Planning
    Estate Planning

    Here’s Why the Role of a Financial Advisor in Estate Planning Is Critical

    November 1, 2021
    By WiserAdvisor Insights
  • Coronavirus-Outbreak
    Financial Planning

    6 Lessons from the Market’s Reaction to the Coronavirus Outbreak

    April 16, 2020
    By WiserAdvisor Insights
  • Preserve-Wealth
    Financial Planning

    10 Strategies for Preserving Your Wealth

    April 7, 2021
    By Jonathan Dash
  • estate
    Estate Planning

    Things You Need to Know About Estate Planning in a Second Marriage

    October 10, 2019
    By WiserAdvisor Insights
  • Investment-Industry-Conflicts
    Financial Planning

    Potential Conflicts Within the Investment Industry

    December 24, 2019
    By WiserAdvisor Insights
  • Financial-tips
    Financial Planning

    Financial Tips for a Lifetime

    October 29, 2019
    By WiserAdvisor Insights

You might be interested

  • Retirement-Corpus
    Retirement Planning

    How to Find the Right Withdrawal Rate from Your Retirement Corpus?

  • Improve Your Finances Significantly
    Financial Planning

    3 Simple Steps to Improve Your Finances Significantly

  • Lifetime-Income
    Investment Management

    Everything you Need to Know About Lifetime Income Options

Don't miss out! Get our Helpful Financial Tips Newsletter

  • Popular Posts

  • The benefits of working with a financial advisor - WA

    The benefits of working with a Financial Advisor

    By WiserAdvisor Insights
    July 16, 2019
  • Financial-Professional

    How to prepare for a meeting with your Financial Advisor

    By WiserAdvisor Insights
    July 8, 2019
  • Do's & Don't investment portfolio

    The Dos and Don’ts to Protect your Investment Portfolio in a Bear Market Amid The ...

    By WiserAdvisor Insights
    April 22, 2020
  • retirement-accounts

    Choosing the Best Retirement Accounts

    By WiserAdvisor Insights
    July 8, 2019
  • Retirement-Planning

    Retirement Planning checklist

    By WiserAdvisor Insights
    July 8, 2019
  • Why investing for goals is the right way of investing

    Why Investing for goals is the right way of Investing?

    By WiserAdvisor Insights
    July 16, 2019
  • Portfolio diversification

    5 Dangers of Over-Diversifying your Portfolio

    By WiserAdvisor Insights
    July 26, 2019
  • Financial Planning for couple

    The Complete Guide on Financial Planning for Couples

    By WiserAdvisor Insights
    August 1, 2019

Categories

  • Business Finance (2)
  • Education Planning (29)
  • Estate Planning (20)
  • Financial Advisor (1)
  • Financial Advisor Guide (27)
  • Financial Planning (111)
  • Investment Management (54)
  • Personal Finance (9)
  • Portfolio Management (1)
  • Retirement (9)
  • Retirement Healthcare (1)
  • Retirement Planning (79)
  • Retirement Plans (1)
  • Uncategorized (2)

The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.

WiserAdvisor is America’s oldest and largest independent network of screened financial advisors. We make it easy and convenient for consumers to find and connect with advisors in their area. We have successfully helped over 100,000+ individuals find their best financial advisor since 1998 with no match fees, no commitments, no obligation, and complete confidentiality. WiserAdvisor has been featured in The Washington Post, The Washington Journal, ABC, CBS, Yahoo and has been seen in numerous other leading financial news and information websites.

Follow Us

  • Recent

  • Popular

  • Financial Planning for a Baby

    Financial Planning To Prepare For a New Child

    By WiserAdvisor Insights
    June 20, 2022
  • Lower Your Financial Advisor Fees

    How to Lower Your Financial Advisor Expenses

    By WiserAdvisor Insights
    June 13, 2022
  • ROTH IRA 5 YEAR RULE

    A Guide to the Roth IRA 5 Year Rule

    By WiserAdvisor Insights
    June 9, 2022
  • The benefits of working with a financial advisor - WA

    The benefits of working with a Financial Advisor

    By WiserAdvisor Insights
    July 16, 2019
  • Financial-Professional

    How to prepare for a meeting with your Financial Advisor

    By WiserAdvisor Insights
    July 8, 2019
  • Do's & Don't investment portfolio

    The Dos and Don’ts to Protect your Investment Portfolio in a Bear Market Amid The ...

    By WiserAdvisor Insights
    April 22, 2020

Contact Us

Corporate Headquarters

12150 Monument Drive, Suite 700
Fairfax, VA, 22033

Business Hours

8:30 AM – 5:00 PM EST (Monday – Friday)

Email Address

wa.assistance@wiseradvisor.com

Phone Number

(703) 651-2060

Fax Number

(703) 259-4487

  • Privacy Policy
  • Terms & Conditions
© Copyright 2021 WiserAdvisor.com. All Rights Reserved.

Add WiserAdvisor - Blog to your Homescreen!

Add