Whenever a recession occurs in the U.S., there is always renewed interest in bonds. Why? Bonds are seen as the ultimate safety net. While you can still lose money with bonds because their returns aren’t definite, they are much less volatile than the stock market. Bonds always perform better overall than the stock market during recessions.
When you buy a bond, you are basically lending money to a certain entity. In exchange, you get paid a certain interest rate when the bond matures. The rule of thumb is that you want to have a diversity of bonds in your portfolio. You don’t want to get stuck with all one type of bond.
Why don’t more people invest in bonds for safety and security? Bonds simply do not have the profit potential of stocks, and they barely beat the inflation rate. Unless you’re just a few short years away from retirement, this kind of investment may not be your best bet.
If you elect to sell your bonds before maturity, you may have to sell them at a discount and lose money. You may also face commissions from the transaction, furthering your loss.
If you’re in a higher tax bracket, municipal bonds may be in your best interest, because they are tax free. Municipal bonds are traditionally a sort of tax shelter for the rich, but they don’t make much sense to buy if you are in the lower tax brackets. On the other hand, corporate bonds carry a certain level of risk that other bonds do not, so they can yield better profits.