The name's bond, investment bond: A beginnners guide to bond investment
Financial advisor, Sean Kelly joins Africa Melane to talk about how to make the most out of your fixed investments
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Ready to start an investment portfolio or shake up your existing one?
You'll want to think about your risk profile and what your ultimate financial goals are.
For those wanting less risk, a fixed investment, such as bonds, might be the way to go.
With a fixed investment your funds are locked for a predetermined period of time.
A bond is essentially a loan to a government or company on which you earn fixed interest over time.
Financial advisor, Sean Kelly says what appeals to people about a fixed-term investment is the peace of mind.
"Stocks help you eat well, bonds help you sleep well'.
- Sean Kelly, Director - Paragon Wealth Managers
Kelly explains more about how bonds work:
"You're essentially extending a loan to the issuer, typically a government or local authority."
- Sean Kelly, Director - Paragon Wealth Managers
Bonds are typically considered 'safe' investments, says Kelly, because you hold the institution accountable for paying you interest on the capital.
He explains that the interest rate depends on how 'risky' the borrower is considered to be.
"Historically South Africa has had a relatively high interest rate because it is an emerging market and that risk must be priced in."
Sean Kelly, Director - Paragon Wealth Managers
South Africa's ten-year bond rate for yield has averaged around 7.9% since 2008.
However, says Kelly, the high inflation rate environment post - Covid has led to countries all over the world increasing their central bank rates, which has affected fixed-interest instruments.
Kelly says it's worth noting that higher-risk investments, such as stocks on the JSE have averaged around 5.4% over the last five years.
"So bonds, which are low risk, have out performed the JSE by around 3.5% over the past ten years."
- Sean Kelly, Director - Paragon Wealth Managers
"Investors are rightfully asking themselves, why should they take on higher risk for less return?"
- Sean Kelly, Director - Paragon Wealth Managers
"A lot of investors are seeing opportunities in bonds and saying it is a good time to go in because of this high interest environment."
- Sean Kelly, Director - Paragon Wealth Managers