Optimize Your Business Revenue with Bond Portfolios

Article details provided by Tracy Baughman, SVP, Chief Investment Officer.

“A business with excess cash may want to start investing in a bond portfolio to diversify funds and earn interest,” said Tracy Baughman, Senior Vice President, Chief Investment Officer.

Bonds, or fixed-income investments, provide competitive returns that are more reliable than the stock market. You may benefit from investing in bonds if you have an established nest egg and want to grow it reasonably. A wide variety of bonds are suitable for different financial circumstances. Because bonds can be complex, they often require ongoing monitoring and research.

“Clients who have owned bonds for several years may be hesitant to buy more or continue investing in them since they could have seen balances drop or losses on their holdings as rates increased. However, it is important to understand that bond returns are inversely related to rate changes,” he continued. “For example, no one will want to own your 5% bond if 6% bonds are available. You must drop the amount you would accept to equate to the 6% bond if you were to sell. If you have a bond with a face value of $1,000 and a coupon rate of 5%, you would receive $50 in interest payments each year. If interest rates rise to 6%, and you wanted to sell your bond, you would need to sell your bond for less than $1,000 to appeal to potential buyers. The price drop must equate to the 6% yield someone can get on a newly issued bond.”

Another important aspect of bonds is the time left until maturity, also known as duration. If your bond matures tomorrow, there will not be a significant impact from the rate changes. However, if it doesn’t mature for 30 years, the rate change will have a more pronounced effect on the price. Managing the duration of the portfolio is essential in both raising and lowering rate environments.

Mutual funds or Exchange Traded Funds (ETF’s) may consist of pools of bonds and offer practical investment opportunities. “If a portfolio of individual bonds is not appropriate, depending on the size of the account, we buy a variety of mutual funds to ensure we are able to obtain a diversified mix between the types of bonds, maturities, and credit qualities,” Mr. Baughman said.

A mutual fund may include:

• U.S. Treasury bonds
• Municipal bonds
• Corporate bonds
• Commercial property bonds
• Mortgage-backed bonds

It’s important to consult a financial expert if you’re considering investing. Your wealth management team will review your finances and create a strategy to invest on your behalf.

“Due to the more recent rate increases on bonds, you can now get roughly 75% of the historical stock market return with less than half of the risk,” Mr. Baughman said. “You can keep up with inflation or maintain an income stream to meet your needs.”

Croghan’s Wealth Management Team conducts extensive research and review processes to ensure you receive a curated list of investment opportunities to optimize returns. We will keep an eye on your investments to hedge against potential issues so you can rest easy knowing your money is being put to good use.