plonkee money an english-er's thoughts on personal finance

September 4, 2007

bonds and gilts

Filed under: investment — plonkee @ 12:00 pm

Bonds and gilts (some times known as fixed interest securities) are ways to lend money. There are essentially two entities that you can lend money to – governments and companies. In the UK loans to governments are called gilts and loans to companies are called bonds. In return for lending your money, the government or company will pay you interest and so you can make some money. The return is not guaranteed, bonds and gilts are only as good as the entity that’s backing them – Western governments  are probably the safest, with blue chip companies listed on major stock exchanges running them a pretty good second. As is the case with shares, it is common to pool money with a number of investors by investing in a bond, gilt, or fixed interest fund.

Bonds and gilts are generally considered to be a hedge against the stock market. They tend to offer lower rates of return than investing in stocks and shares, but are less volatile and often increase in value when the stock market is falling. They are a useful as they tend to reduce risk when used in a portfolio with stocks and shares, in compensation for their reduced returns. The closer you are to cashing in your portfolio, the more important it becomes to lock in the growth that you already have, and reduce the impact of a market drop on your assets. For this reason, in terms of investing for retirement, the closer to retirement age you are, the greater the share of your portfolio is likely to be recommended to be in bonds and gilts.Bonds and gilts (some times known as fixed interest securities) are ways to lend money. There are essentially two entities that you can lend money to – governments and companies. In the UK loans to governments are called gilts and loans to companies are called bonds. In return for lending your money, the government or company will pay you interest and so you can make some money. The return is not guaranteed, bonds and gilts are only as good as the entity that’s backing them – Western governments  are probably the safest, with blue chip companies listed on major stock exchanges running them a pretty good second. As is the case with shares, it is common to pool money with a number of investors by investing in a bond, gilt, or fixed interest fund.

Bonds and gilts are generally considered to be a hedge against the stock market. They tend to offer lower rates of return than investing in stocks and shares, but are less volatile and often increase in value when the stock market is falling. They are a useful as they tend to reduce risk when used in a portfolio with stocks and shares, in compensation for their reduced returns. The closer you are to cashing in your portfolio, the more important it becomes to lock in the growth that you already have, and reduce the impact of a market drop on your assets. For this reason, in terms of investing for retirement, the closer to retirement age you are, the greater the share of your portfolio is likely to be recommended to be in bonds and gilts.

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