The new year is often a time for people to review their finances. They reflect on how they can better manage their money this year compared to the last one. For others, it’s also about getting a jump-start on investing. When thinking about investments, new investors often gravitate toward stocks as an asset class for their portfolios. However, depending on your risk profile and investment goals, you can create a more diversified portfolio by including bonds, which is another asset you can consider that can help reduce risk and generate periodic income.

What are bonds?

Bonds, also known as debt securities or fixed-income securities, are essentially loans made to a government or a company. When you purchase a bond, you’re lending money to the issuer in exchange for interest payments at certain times during the year and the return of your initial investment amount (your principal). Usually, your principal is returned at maturity — the date the bond issuer pays back everything they borrowed from you. Bonds offer a way for entities to raise capital while providing investors with a relatively stable investment option. While bonds do carry some risk, they are typically less volatile than stocks. They also give investors periodic income, usually quarterly or every six months, making them more attractive to investors with a lower risk threshold who seek stability or those who need of income or cash flow from their investments.

Below are some of the most popular types of bonds:

• Global Bonds are issued and traded outside the country where the bond’s currency is denominated. Most of these bonds are issued out of the United States (US) in US dollars. These bonds can be issued by corporations or governments, to raise capital in international markets. Trinidad & Tobago, the Bahamas, and Jamaica have all issued global bonds. Corporations such as TransJamaican Highway have global bonds too. At NCB Capital Markets, a minimum of US$10,000 is typically required to invest in these bonds. They offer the potential for capital appreciation and investors get liquidity through periodic interest payments. These bonds provide risk diversification because they come from entities in different countries and industries. While they are available in all major currencies, U.S. dollar denominated bonds are more popular locally. Interest payments on these bonds are typically made semi-annually.

• USD Indexed Bonds are debt securities with principal and/or interest payments linked to the value of the US dollar relative to the Jamaican currency. These bonds are designed to give the investor USD exposure while still investing in Jamaican dollars.

• Local Corporate Bonds are debt instruments issued by Jamaican companies to raise capital for business operations, expansion, or other financial needs. They can be denominated in JMD or USD, depending on the issuer’s strategy and target market.

• Government of Jamaica (local) Bonds are instruments issued by the Jamaican government in Jamaica to raise funds to meet its financing needs. These bonds can be denominated in either Jamaican dollars or US dollars and are typically sold to local investors.

Benefits of Investing in Bonds

Bonds typically carry less risk than stocks, making them a good choice for preserving capital, especially for investors with less time to recover from losses. They also generate steady income through regular coupon payments. Additionally, they provide sound diversification to a portfolio and can help you build a resilient portfolio that not only provides income but also can weather challenging market conditions. Finally, bonds are a good investment for risk management because fixed income assets are usually less sensitive than stocks to macroeconomic risks like economic downturns and geopolitical events.

Risks of Investing in Bonds

On the other hand, there are also risks associated with bond investing. This includes credit risk, which is the risk that the issuer may be unable to make interest and principal payments when they are due. To mitigate this risk, investors can rely on credit ratings from rating agencies and focus on bonds issued by companies with strong fundamentals and high credit quality, which tend to carry lower default risk. Additionally, while bonds can be traded in secondary markets, most bonds cannot be traded over an exchange. As such, you may need a broker to find a buyer, whereas stocks can typically be sold anytime on an exchange. Another drawback is that bonds will lock in your investment for a fixed period. Interest rate risk is another factor to consider. Since interest rates and bond prices have an inverse relationship, when interest rates rise, bond prices fall, causing the bonds that you currently hold to lose value. However, if you hold the bond until maturity, you should receive your principal back in full.

Suitability of Bonds Within a Portfolio

Bonds are well-suited for medium- to long-term investment goals, providing stability and consistent income while reducing fluctuations in the value of your portfolio. They are also suitable for investors who need periodic income or cash flow from their investments to meet their needs, like retirees. Additionally, if you have a conservative risk profile, giving a heavier weight to bonds can help balance risk and provide more stable returns. By allocating more to bonds, you can reduce volatility while still meeting your income needs, ensuring your portfolio remains aligned with your goals. Ultimately, a diversified approach that includes both bonds and other asset classes is crucial for managing risk and achieving your financial objectives.

Bottom Line

If this is the year that you’ve decided to get serious about working on strategies to boost your financial success, remember that risk diversification is important in your investment journey. In addition to buying stocks, consider investing in bonds, to diversify your portfolio and add an income generating asset. Contact an NCB wealth advisor today to determine how adding bonds to your portfolio aligns with your risk profile and financial goals.

Kimberley Martin – Assistant VicePresident, Corporate Solutions, NCB Capital Markets Limited