Tip: Invest in Bond Mutual Funds

As a new investor, you may be better off with a bond mutual fund, rather than buying individual bonds. As we will see in our discussion of mutual funds, you can enjoy a diversified portfolio with a small investment.

Tip: Use the Laddering Strategy

If you buy individual bonds, you can use a similar laddering strategy that we suggested for CDs. You take the amount you want to invest and split your purchase among bonds with different maturity dates. Your goal is for bonds to come due at regular intervals in case you need the money. If not, you can buy another bond at the prevailing interest rate or explore other investments. When you stagger your purchase of bonds, you’ve hedged your bets in the event that interest rates rise or fall dramatically.

Tip: Reinvest Your Interest

Remember that your return will be higher if you reinvest the interest paid out on the bond. Let’s say you buy a five-year bond for $1,000 that pays 6 percent. At the end of five years, you’ll have received $300 in interest, plus your original $1,000. If you reinvest the $300 in interest as you receive it, you’ll have another $38.23 in five years.

Common Mistake: Overusing Bonds when Young

Bond investors tend to be older and need income to live on in retirement. For younger investors who are years away from retirement, the stock market offers greater opportunities for long-term growth. Nevertheless, as you build a diverse mix of assets for your investment portfolio, bonds are worth considering.

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