Corporate bonds might not get as much media attention as shares, but it’s important for young investors to understand what they are and how they can benefit a portfolio.
There are a few key things that young people need to know about bonds: they’re not just for older investors, you can easily access them on the ASX and you don’t need a large sum to get started.
Bonds aren’t just for “old people”
There’s a bit of a misconception that bonds are only what “old people” invest in. This is incorrect; bonds are available to investors of any age, and they’re not just suited to older investors.
It is true that the older you are the more you should have invested in defensive assets like bonds. But this doesn’t mean they don’t have a place in your portfolio while you’re young – it just means young investors might not need to dedicate as much of their portfolio to defensive assets like bonds.
If you’re young and you have a large portion of your money sitting in a term deposit or a savings account, investing some of it into corporate bonds instead can help you earn higher returns in exchange for slightly more risk.*
There’s a common rule of thumb with investing that you should try to own your age in bonds. Following this suggestion, if you’re 25, you could consider allocating 25% of your portfolio to bonds. Whereas if you’re 60 years old and nearing retirement, you could have closer to 60% or more of your portfolio invested in bonds. Of course, this is just one guideline to consider.
You don’t need a huge sum to get started
Lastly, corporate bonds have traditionally been difficult to access for retail investors as the minimum amounts required were very high. For this reason, young investors would be forgiven for thinking they can’t afford to invest in bonds.
However thanks to exchange traded bonds (XTBs), retail investors can buy units in individual bonds, for prices starting around the $100 mark. Think of it in a similar way to the app BrickX, popular among young Australians as it enables them to buy smaller portions (or bricks) of a property and enter the property market with a much smaller deposit. Just like fractional property investment, you don’t need much to get started with XTBs either.
Bond returns aren’t difficult to access
Younger investors might be surprised to find that they can access bond investments on the ASX with a standard online share trading account. A broad range of ETFs, mFunds and close to 50 XTBs are available on ASX. They can all be purchased on ASX just like buying shares.
However there are key differences between the products. Bond funds and ETFs are continual – they have no end date and therefore unlike a term deposit can’t provide a predictable return before you invest. Also for those investors keen to know exactly which companies they’re invested with, being pooled products makes this harder to keep track of. With XTBs you select an individual company and specific coupon and maturity dates – so your investment is much more transparent.
Once you’ve done your research and decided to invest in an XTB all you need to do is make a note of the 6 digit ASX trading code (there’s a list of available XTBs with their respective codes here). Enter this code into your online trading account, and simply place a buy order like you would with regular shares. Done!
*Term Deposits may enjoy the benefit of protection under the Financial Claims Scheme.
The views of the author are not necessarily the views of XTB. The information in this article is general in nature. It should not be the sole source of information. It does not take into account the investment objectives or circumstances of any particular investor. You should read the PDS that relates to that Class of XTB prior to making an investment decision and consider, with or without advice from a professional adviser, whether an investment is appropriate to your circumstances. Australian Corporate Bond Company Limited is the Securities Manager of XTBs and will earn fees in connection with an investment in XTBs.