For smaller investors the retail bond has not, in the past, been a realistic option. However, partly as a result of the credit crisis, the recession, the double-dip recession, etc. etc. a credible market for this type of bond has developed. However, although more widely accessible, this type of investment is probably only suitable to more sophisticated and savvy investors. If you’re considering retail bonds, some simple steps should help to find a potentially rewarding investment.
Too Good To Be True?
As banks and investment trust managers have become reluctant to lend, or invest, in major retailers the widened retail bond market has developed. Of course, this should be a warning in itself but bonds can offer some very attractive returns. With interest rates low in most other sectors, the retail bond can seem almost too good to be true. Risk is the biggest issue in this case. In the last few years, many well-loved and well-respected High Street retailers have left not only the building, but the High Street and have stopped trading completely. Household names have failed at an alarming rate and this means that those investing in retail bonds should do their homework, in great detail. Bonds should generally be viewed as a longer term investment; it’s rarely wise to cash in the bond (and rarely profitable) before the term of the bond is over.
Shares and Bond Comparisons
Bonds are effectively an IOU whereas shares are ownership of the company. Bonds offer a fixed return over time and your capital back at the end of this period. Shares, as we all know, can fluctuate, although over longer periods this can average out as a great return. Dividends on shares are not guaranteed but you can divest yourself of shares when they’re in demand, potentially ensuring you get all of your money (and some extra) back. In the event of a company failing, however, bondholders take priority over shareholders in terms of getting anything at all back (still not guaranteed).
Attractive Rates can Turn Ugly
Opening a bank account is, mostly, free; this is not the case with shares or bonds, and you should factor in the costs of buying and selling shares or bonds. You’ll pay more than one per cent on most deals and this can add up quickly, eating into your returns. Interest rates on bonds are often fixed; while the base rate has been flat lining for years now, this doesn’t mean it can’t move (and it can really only go up now). This can make your bond rate look less attractive and also means that they will not be easy to sell. There is one alternative, the inflation linked bond, but this has a lower yield in the first place.
The Eggs and Basket Thing
An investment strategy is essential for investors, perhaps more so than ever before. A diverse portfolio can (perhaps should) include a selection of stronger performing retailers in the form of bonds and shares. As ever, diversification in bond selection and balancing overall type of investments in your portfolio is the key to ensuring that you reap the rewards that bonds can offer, without risking everything.
Bryan Taylor is an experienced blogger. His interests are blogging, investing and stock markets. He has written articles for a lot of companies such as EK Bamboo Investments.
Image Courtesy of Rafael Matsunaga | License: Creative Commons