Bonds and individual retirement accounts (IRA) offer two distinct options for personal investors. Investors can buy and sell bonds quickly or include bonds in a longer-term investment strategy, but IRAs are limited to long-term investment horizons. Savvy investors use both bonds and IRAs as parts of comprehensive investment plans. Comparing bonds and IRAs can help you to understand the different investment options available for supplementary income or retirement savings.
The return on investment (ROI) that investors expect to receive differs between bonds and IRAs, as do the expected payback timelines. Investors can choose to buy new bonds and hold them to maturity for a stated interest rate, receiving exactly what they expect in a set amount of time. However, expected ROI can change a bit when investors trade bonds on the bond market, since a number of unforeseeable variables can influence bond prices at any given time. Investments in IRAs generally cannot offer a guaranteed rate of return, and can accumulate value relatively slowly, quickly or not at all.
The bond market opens up a new world of profit potential for bondholders, including both casual investors and professionals. Individual retirement accounts such as Roth IRAs and 401k accounts must be viewed as long-term investments due to the absence of a secondary market and the fact that IRA accounts cannot be traded. Because of this, a number of employer-sponsored IRAs can be transferred between employers, or employees can take full personal ownership of their accounts after leaving their jobs.
Albert Einstein once said that compounding interest is the most powerful force in the universe. Both bonds and IRA investments offer the opportunity to compound capital gains and interest over time for ever-increasing portfolio values. Compounding is automatic in IRAs; your account continues to grow and earn more profit over time, assuming the underlying investments perform as expected. With bonds, investors must make a conscious choice to reinvest interest earned or capital gains on trades. If an investor chooses to continually reinvest all bond interest in new bonds until retirement, the effect can be much the same as an IRA.
Bonds carry an inherently lower risk of loss than IRA investments due to their virtually guaranteed payback at maturity. Bond traders who cannot sell a bond they hold for a quick profit have the option to wait out the bond's life and receive the principal back at maturity, in addition to all interest payments received. Individual retirement accounts work similarly to mutual funds, introducing the risk of loss inherent in any fund comprised of stocks and other securities. An IRA weighted heavily with bonds held to maturity can provide an extra layer of protection to account-holders, bringing some of the reliability of bonds into the IRA account.
Bonds are an active investment, requiring investors to educate themselves and stay informed of current trends in the bond market as well as conditions in different industries and the economy as a whole. An IRA allows an investor to sit back and take a hands-off approach to investing, trusting his money in the hands of an experienced investment professional.
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