Finding a safe place for your hard-earned savings that you have put aside for a big purchase such as a house, can seem daunting. Your best choice might be short-term bonds with maturities shorter than 2 years. Because bond values drop when interest rates rise, short-term bonds protect your money from losing value when the economy strengthens and rates go up -- one of the reasons short-term bonds are considered safe investments. You may buy them directly from the U.S. Treasury or purchase short-term bond mutual funds or short-term bond exchange traded funds, known as ETFs. Either way, you are making an investment that will keep your hard-earned money relatively safe.
Determine your risk tolerance. If you are investing in short-term bonds because you think interest rates are moving higher, and you don't want to lose principal value, your risk tolerance is low. The U.S. Treasury regularly issues Treasury bills and 2-year notes that can be purchased through the Treasury Direct website.
Consider buying short-term municipal bond funds or short-term bond exchange-traded funds if you have little or no experience with bonds. The benefits of buying a fund include professional bond portfolio management and the ability to invest small amounts of money. Buying corporate or municipal bonds directly on the open market through your broker can be a challenge if you aren't investing $100,000 or more.
Place your orders online at the Treasury Direct website, if you plan to buy Treasury bills or notes. Your broker can suggest a good short-term mutual fund or ETF and can handle your buy transaction, or you can go directly to the mutual fund to purchase your securities.
- The Securities Industry and Financial Markets Association recommends laddering your bond purchases during periods of rising interest rates so you have a bond maturing every month, enabling you to reinvest at higher interest rates. This strategy is useful if you invest directly through Treasury Direct, but is unnecessary if you purchase a mutual fund or ETF because that is a strategy the fund manager is using in optimizing the return of his portfolio.
- When interest rates are low, don't have your money in long-term bonds. Interest rates fluctuate and can go much higher as an economy improves. One way to ride the interest rates up without losing principal value is through buying short-term bonds. As interest rates rise, the prices of long-term bonds decline, and if you are forced to sell, you probably won't get back what you paid. If your money is in short-term bonds, with maturities under two years, a rise in interest rates will only moderately affect the price of your bond, but you will experience no effect at all if you hold the bond to maturity.
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