Tips for Buying Treasury Bonds
Like choosing a career or a life partner, buying a Treasury bond can be a rewarding 30-year relationship. The key is knowing what to expect before signing on the dotted line.
First, weigh the benefits against the costs. When you buy a bond, in exchange for a steady, reliable return you accept relatively low interest rates. That means you need to invest a larger sum in bonds than in stocks or other Treasuries in order to make the same return. Also, while the interest pays every six months, you won't see your initial investment money for up to 30 years, assuming you keep the bond to maturity. That could be a problem if you need it before then.
On the other hand, bonds require less maintenance than stocks or a mutual fund. Barring some drastic swing in interest rates, you can feel comfortable holding onto your investment, reaping its returns until it matures. And since many brokers charge a fee per transaction, that can save money in the long run.
If you're willing to accept the conditions, take time to compare brokers. Decide what features are most important. Are you a confident investor who only needs an authorized agent to make trades? Or do you want the reassurance of being able to phone, e-mail or text an individual broker with questions and concerns? Either way, you'll want a competent broker who understands your financial goals and will help manage your investments to meet them. Ask for references to see how experienced he or she is with clients of your means and situation. And, although most brokers operate ethically, it can't hurt to run background checks on your candidates through the Securities and Exchange Commission's Investment Adviser Public Disclosure Web site.
Making money is the point of this whole venture, so learn how -- and how much -- brokers charge for their services. Besides transaction fees, they may charge a commission or flat fee based on the size of the bond. Also, brokers typically charge a markup when they sell you a bond, the amount of which they don't have to disclose. Again, ask. A markup of 1 to 2 percent of the bond's price is considered fair.
We hope this primer sets you on the path to years (at least 30) of happy investing. As guidance on using your riches, we suggest this quote from novelist Miguel de Cervantes, who set many of his characters on similarly long-term quests: "The gratification of wealth is not found in mere possession or lavish expenditure, but in its wise application" [source: Forbes].
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