Narrowing Down the List of Bond and Cash-Equivalent Instrument Universe
Reflect
When investors say the bond market is "large", they are referring to the fact that the U.S. market has over $46 trillion in outstanding debts that are converted into bonds as well as bond funds. With so many different types of bonds as well as other cash-equivalent instruments available to investors, how do you know where to start?
We're here to help you narrow down what bonds or other cash-equivalent instruments go into your portfolio. The most important first step is to determine the allocation need you are trying to meet. For example these needs may include: funding emergencies, short-term spending, defined dates for spending, tax efficient instruments, ongoing or buffer allocation as well as generation of increased income. Whatever your goals and allocation are, will effect what types of bonds or cash-equivalent instruments should reside in your portfolio.
Next, it's time to determine if you should focus on individual bonds versus bond funds. While individual bonds may be used in bond ladders and have defined maturity dates, they also have certain limitations like the fact that they are tougher to buy in small amounts and to build a diversified portfolio.
Other the other hand, bond funds provide investors with easy access to a diversified portfolio, may be easier to quickly buy and sell, but also have various limitations such as no clearly defined maturity dates as well as ongoing expenses that will need to be managed.
Lastly, you will want to consider your need for cash-equivalents like treasury bills, CDs, money market funds or savings accounts.
Use our handy "How to Narrow Down the Bond and Cash-Equivalent Universe" checklist to see what you may want to add to your portfolio. Now, it's your turn to put your knowledge to the test with our discussion activity of the week.
Participate
For this lesson, we challenge our members to look over the checklist attached to this lesson and then make a list of the types of bonds or cash-equivalent instruments they are missing from their portfolio. Please share your results below!
Discussion Example
- Because my goals are long-term and will be funding activities like retirement and long-term care for my parents, I will look for high-yield bonds and municipal bonds for now. As I get closer to my goals, I will probably add other cash-equivalents like money market funds to my portfolio.
Download the "Selecting and Managing Your Investments" worksheet
Questions about coursework, webinars, worksheets, etc.? Drop your inquiries in the discussion below. We're happy to help!
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Jenna Brashear
AAII Community Manager
Chicago, IL
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