Pros of investing in bonds include:
Less volatility: In comparison to share prices, bond prices tend to fluctuate much less, making them a safer long-term investment.
Diversification: The diversity that bonds add to your portfolio may be their most important advantage. Bond holdings can help lower your financial risk, even though shares have historically outperformed bonds over the long run.
Fixed investment returns: During the life of your bond, you receive a fixed rate. Your principal investment is returned when the bond matures. This allows you to know exactly how much your returns will be.
Cons are:
Long time horizon: The maturing age of most bonds typically ranges from 5 – 20+ years, meaning that you may have your money locked away for an extended period of time. This may not be viable for many investors.
Larger sum of investment required: Some bonds can be purchased for relatively low amounts, such as upward of $1000. However, some bonds can require much larger amounts which may place them out of reach for some investors.
Issuer default: Whilst this is an unlikely scenario, there is still a possibility that the bond issuer may default and be unable to meet their repayment responsibilities. This default can ultimately put both your interest payments and the return of your principal at risk.
Smaller return on investment: Investing in bonds tends to offer a lower return on investment in comparison to shares and other financial assets.
Market transparency: Bond markets are typically less transparent than the share markets, especially to individual investors. You often need to work with a third party, such as a broker who carries out trades on your behalf, which can reduce your confidence in the fairness of the price you pay or get for your bonds.