Adding bonds to your investment mix

Bonds can play an important role in investment portfolios, but what exactly are they, what are their benefits, and how do you invest in them? 

What are bonds?

Bonds are a type of investment security that enable investors to lend their money to a bond issuer for a set term in return for regular income payments based on a fixed or floating interest rate.

Bond issuers are typically governments, large organisations and companies, which often choose to borrow large amounts of money for different purposes from a pool of investors via the global bond market.

When the term of a bond issue expires the issuer is expected to repay investors their principal investment amount in full.

What are the benefits of bonds?

Bonds are often described as defensive assets. While the capital value of bonds can fluctuate along with changing economic conditions, the issuers’ ability to repay the principal, and interest rates, they are generally less volatile than growth assets like shares and property.

If you hold a bond until the end of its term (maturity), you know how much to expect back at maturity (the face value) and how much you’ll receive along the way (coupon payments).

If you buy or sell bonds before maturity, you are exposed to more volatility as the capital value can fluctuate along with interest rates and market conditions.

Interest rates are one of the primary drivers of bond pricing, with prices typically moving inversely to interest rates. I.e. when interest rates rise bond trading prices fall, and when interest rates fall, bond trading prices rise.

However bonds generally provide more capital stability for medium to long-term investors than shares, which don’t offer an agreed schedule of dividend payments or the full principal repayment at the end of a given term.

As well as providing diversification from shares, property and other assets, investing in a broad range of bonds can also help diversify your returns.

Historically, bond prices have tended to be positive when share prices have been negative. This typical inverse relationship between bonds and shares can provide balance to your investment portfolio.

How do you invest in bonds?

You can buy government and corporate bonds through public offers when they are first issued or on the secondary bond market. High minimum transaction sizes may apply as these markets are considered ‘wholesale markets’.

While some bonds are available to buy and sell on the Australian Securities Exchange with lower transaction minimums, the range can be limited, restricting your ability to build a diversified portfolio.

Managed bond funds and exchange traded funds (ETFs) can be a more flexible, less restrictive way of building a broad portfolio because they are able to purchase more securities that have high transaction minimums due to scale.

The different types of bond funds can give you access to different markets and sectors, providing greater opportunity to diversify your portfolio. Talk to us to find out more. 

Source: Vanguard June 2023

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2023 Vanguard Investments Australia Ltd. All rights reserved.

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Interprac Financial Planning Pty Ltd 

Darryl Jopling

Senior Adviser

I have worked in the financial services industry since 1982 and as a Financial Adviser since 1999.

I have worked for large Financial Planning businesses, Membership based organisations and looked after the financial planning needs of clients within an Accounting Practice before starting my own business.

I am married, have 4 older children and a grandson and I am keen golfer with mixed results like many .

I have been through many of the strategies I talk with clients about myself and with my family.

I have been through the journey of seeing my parents move into Aged care and negotiated the difficulties and pitfalls of understanding the system for them and this gives me an excellent insight into what is required to assist families at this difficult time.

In a previous roll I used to run retirement seminars looking at Centrelink and Retirement Incomes and how to make these work for you. I have helped many of my clients with Aged Care advice when their parents needed to move into Nursing Homes. For many clients I assist them with superannuation, building wealth and protecting their loved ones with insurance.

I am supported by his, Licensee, Interprac Financial Planning’s in-house resources and ongoing technical, systems and training.

I am committed to understanding your needs and identifying strategies and products to help you achieve your goals.

My guiding principle as an Adviser is to design plans which help to provide my clients with clarity of purpose and the opportunity to build a solid financial foundation.
I will take the time to listen, explain things clearly and keep you informed throughout the advice process.

My experience is complemented by professional qualifications including:

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Whether you are getting married, starting a family, embarking on the trip of a lifetime, planning to enjoy your years after work or assisting elderly parents with Aged Care and Nursing Home placements, we can help.