An Investor’s Checklist: Ask The Following Questions When Creating An Investment Strategy

Introduction

Since, bond investment like other investments must be tailored to meet your overall investment goals, risk tolerance capacity, and other individual circumstances, ask yourself some basic questions that will help you make a decision on the appropriate mix of securities that will deliver your investment objectives.

What is your current investment status? Ask yourself, what your current investment status is, whether you have any savings or investments, and if so what percentage of your investments are in savings accounts, money market funds, bonds, stocks, etc., whether investment in cash, bonds, bond funds are less than 15% or 20% of your total investments. Further, do you have a lump sum to invest and if you expect to invest on a regular basis.

Investment Status Perspective: It is recommended all investors should maintain a diversified investment portfolio made up of stocks, bonds and cash in varying percentages, depending on individual circumstances and investment objectives. Typically, older or retired people invest in a higher proportion of bonds, while, younger or first time investors should protect their investment portfolios by diversifying, so if one asset class is in a cyclical downtown, rising values of another asset class will offset the negative impact.

Investment Objectives: Ask yourself what your investment objectives are, whether you wish your investments to provide income to meet current expenses, or save for your retirement, or the children’s college education, or accumulate or preserve your capital.

Investment Perspective: Typically, bonds are predictably safe, providing interest payments and principal repayments, making them important for people who want to receive interest income or wish to preserve and accumulate capital. Those looking for a current income should invest in fixed interest rate bonds, as there are no changes in the interest rate till maturity, and interest is paid on a semi-annual basis.

However, for retirement savings, children’s education or capital accumulation goals, one should invest in zero coupon bonds, as they do not have periodic interest payments. This bond type sells, substantially discounted from face value, with the investor receiving a one time payment i.e. purchase price (principal) plus interest, which is compounded semi-annually at the original interest rate.

When You Need Your Money Back: An investor should ask himself / herself, when he / she needs the money back, whether a year from now, or five, ten, twenty or thirty years down the line.

Money Back Perspective: Your choice of bond maturity will depend on how soon you wish the principal to be repaid. As a rule, the longer the bond’s maturity date, the higher the return.

How Much Are You Willing To Risk? Ask yourself whether you want to risk very little, modestly or substantially?

Risk Perspective: All investments carry an element of risk, and when investing in bonds, it is important to remember your investment’s return is linked to its credit, as well as, market changes. The higher your return on bond investment, the higher the risk, while conversely, safe investments offer relatively lower returns. Your bond choice ranges from either the highest credit quality US Treasury securities, backed by the US government to below investment grade bonds, considered highly speculative. And, if you sell a bond before its maturity date, you receive the prevailing market price that could be more or less than the price you bought it for. Bond values fluctuate with the market in the opposite director of interest rates.

The bonds you purchase for your investment portfolio depend greatly on your risk tolerance capacity.

Impact of taxes on your investments: Check out what income bracket you fall in, as returns from bonds could have you paying higher taxes.

Tax Perspective: Certain bonds, such as, US Treasury bonds offer special tax advantages and there is no state or local income tax on the interest received from them. Neither is federal income tax is imposed on interest from municipal bonds, and in many cases they are exempt from state or local income tax, as well. When buying bonds, base your decision on your income tax bracket i.e. whether to invest in taxable bonds or tax-exempt bonds. The answer depends on your income tax bracket, and the difference between what can be earned from taxable versus tax-exempt securities, not only now, but also through the period until your bond matures. The decision, whether to invest in a taxable bond or a tax-exempt bond can, also depend on whether you will be holding the securities in an account that is already tax-preferred or tax-deferred, such as a pension account, 40l(k) or IRA. For example, a municipal bond will not bring you the tax benefits it otherwise might, if you hold it in a tax-deferred account.

Ask yourself what kind of bonds you should invest in? Whether, individual bonds, bond funds or unit investment trusts.

Type of Bonds Investment Perspective: There are number of ways to invest in bonds from buying individual bonds, bond funds or unit investment trusts. Generally, individual bonds are the best way to invest for preserving your capital; while, bond funds offer convenience and diversification even at minimum investment levels. The minimum investment for bond funds and UITs is typically between $1,000 and $2,500, and $500 for retirement accounts. Individual bonds are usually sold in $5,000 denominations and dealers will sometimes ask for a minimum investment of $20,000.

Once you have gotten your investment goals and objectives in perspective, you can with the help of an investment advisor diversity your investment portfolio to minimise your risk.