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Bond Investment Risks and How to Overcome Them
There are differences in the risk of stocks and bonds, where bonds have a lower risk level than the risk of stocks, but that does not mean bonds have no risk.
Examples of such risk cases can be such as not receiving a bond repayment, which is just one form of risk that bond investors may face, which is called default risk.
There are various kinds of bond investment risks and how to overcome them, including:
1. Bond Investment Risk
1.1. Option Risk
The first bond investment risk is option risk. The criteria for choosing the wrong bond is a very vulnerable risk for the many investors who decide the false bonds because they are based on yields without paying attention to future risks.
Because the yield is used as the only basis for selection, then the comparison will not be valid because you can only compare yields to make choices if the risk level is the same.
1.2. Market or Interest Rate Risk
If investors who have held bonds in payment are due, they will not get higher interest money. This is a risk for investors because they do not get higher interest rates.
1.3. Default Risk
This risk can be in the form of cancellation or postponement of interest payments and even more so if the company cannot pay off the bonds at maturity.
1.4. Liquidity Risk
The risk of investing in liquidity bonds relates to the ease with which investors can sell their bonds at a fair price.
1.5. Diversification Risk
The point is, don't put all the eggs in one basket. This means that this risk is a risk if the potential income and portfolio growth will deteriorate due to the absence of diversification.
1.6. Risk of Bonds Paid Before Maturity
The absolute risk of investing in bonds is paid off before maturity. Some bonds exist, which contain a condition that the bond issuing company has the right to pay off the bond before maturity.
2. Strategies for Overcoming Bond Investment Risks
2.1. Passive Strategy: Buy and Hold
This strategy is in the form of buying and holding a bond until maturity and reinvesting it. By holding bonds to maturity, investors will not be affected by changes in bond value caused by bank interest rate changes.
2.2. Semi-Active: Immunization
Immunization is a hybrid strategy that has both passive and active elements. Investors who want a high rate of accumulation of yield in a certain period in the future are suitable to use this strategy.
2.3. Active Strategy
For investors who want to get the highest possible return, this active strategy provides the most incredible opportunity to get it, of course, with a greater risk. There are several active strategies to choose from, namely:
2.4. Interest rate anticipation strategy
This strategy is quite risky because it depends on uncertain forecasts about the future behavior of interest rates. Its purpose is to protect investments when interest rates are expected to rise and get capital gains when interest rates are expected to fall.
2.5. Assessment analysis strategy
With this strategy, investors can choose an association based on its intrinsic value. The result of the calculation of the inherent value is compared with the bond price in the market. If the market price is higher than the intrinsic value, the bond is overvalued; conversely, if the market price is lower than the inherent value, the bond is undervalued.
Those are some of the risks of investing in bonds and strategies that you can implement to minimize investing in bonds, hopefully useful.