Market volatility and how bonds should be selected to be part of investment portfolio

Date: March 2, 2021

Key takeaways:

  • Bonds can help to diversify one’s portfolio.
  • They are essentially IOUs. Investing in a bond means lending cash to the issuer of the bond.
  • Investors expect to have their principal amount repaid in the future while typically receiving a return, in the form of coupon or interest payments, on a periodic basis.
  • Bonds can be issued by many types of entities, each with different default risks. In general, sovereign bonds have the lowest default risk.
  • There is no ‘free lunch’ as investing in bonds with low default risks tend to provide low returns, and vice versa.
  • The rating of both the issuer and its bond provide a helpful indication of the level of default risk. However, not all bonds nor issuers are rated.
  • Risk-adverse investors should only invest in bonds issued by an entity which is financially strong.
  • Institutional bonds are traded over-the-counter (OTC) while Singapore retail bonds are traded on the Singapore Exchange (SGX).