Although interest-bearing securities such as corporate bonds, treasury obligations, and certificates of deposit are regarded as an investment strategy for the rich and sedentary, my belief is that they belong in every growing estate, and the sooner, the better. What occurs is a multiplying effect that, over time, is little short of phenomenal. What happens, simply, is that the interest paid earns more interest, which in turn earns more interest, which in turn . . . I think you get the picture.
Over the long haul, corporate bonds are an excellent way to amass an estate, slowly but surely. However, these investments pose certain risks, so you must exercise care as you pursue this market. When selecting investment bonds and deciding where to invest money, consider the following:
- Deal with a brokerage firm, whether conventional or on the web, that offers a broad selection of company-owned or controlled bonds which can be purchased from their daily generated lists at a net price to you. This is preferable to chasing bonds on the open market.
- Deal exclusively in corporate bonds of major public companies, preferably those listed on the New York Stock Exchange (NYSE). Avoid the municipal (muni) bond market, despite the tax avoidance benefits they offer, and irrespective of high ratings that certain municipal bond issues may enjoy. The likelihood that bond-issuing governmental agencies may work hand in glove with courts and regulatory bodies to jeopardize bondholders in difficult financial times seems more than a vague possibility.
- Select bonds with maturities in the range of two to five years. Though you may receive somewhat lower interest than with longer-term bonds, you protect yourself from fluctuation due to changing interest rates. In addition, by holding your bonds this relatively short period to full maturity, you avoid marketing them through a stockbroker, thus saving a commission on the sale.
- Avoid corporate bond funds; they offer nothing that you cannot do better yourself. The "diversification" benefit of a fund over even small purchases of bonds is minimal if you choose your bonds with care. As to the debate over load funds versus no load funds, be assured the load is there somewhere. The primary reason brokerage firms prefer a fund over individual bond purchases is that commission per invested dollar is far greater, sometimes as much as fivefold.
- Try to select bonds that can be purchased at discount or, at most, par. If a premium must be paid for the bond, make certain its terms provide it cannot be called (paid off) by the issuing company early at a price less than your purchase price. If you ignore this, you may experience yield to call being far less favorable than your anticipated yield to maturity.
- Despite my quarrel with the rating services, avoid bonds with an S&P rating below BBB (known as investment grade). The one exception to this rule might be a bond rated BB+ which appears otherwise to meet the criteria for soundness. The particular advantage is that, with its failure to qualify as investment grade, it is excluded from many portfolios, and may be priced to attain a disproportionately higher yield. With this sole exception, however, it probably pays to aim for the BBB and A ratings. However, avoid bonds rated AA and AAA, if only because their perceived higher security translates to an inflated price and, correspondingly, a lower yield. The extra safety represented by these more highly rated bonds does not justify the extra price you pay for them.
- Objectively evaluate the basic worth of the underlying corporation Is it in a favored industry? Does the company regularly show a profit? Do the firm’s assets exceed its liabilities? Is there evidence of current problems? Are there any rumors of future trouble that could affect the credit-worthiness of the corporation? Remember that in bond investment it is not opportunity you seek. Rather, you seek certainty.
- Finally, as your portfolio of bonds grows, don’t ignore it. You should review the securities you hold monthly to make certain each continues to satisfy the criteria that justified its initial selection. If factors change in any way so that a bond no longer meets your satisfaction, it should be disposed of at once.