International Bond Funds: A Great Way to Prepare for Retirement

By admin | April 5, 2011

The U.S economy is slowly recovering, however, consumer spending isn’t growing at a quick rate, which is leaving many companies with less growth than expected. For the everyday investor, a company’s slow growth means a potentially lower return than expected, and for those nearing retirement, this could leave them with less in their bank account than expected.

To create a stronger retirement portfolio, many investors are beginning to consider investing in international bond funds, which are funds that invest in the bonds released by foreign governments and corporations. Many foreign governments actually offer higher interest rates on bonds than the U.S. does, as do many foreign companies. For investors, this means that they may be able to diversify their 401k retirement portfolio to produce higher, more stable returns. They may also be able to invest in a hedge against the USD, which can create a win-win situation for investors.

Many are wary of investing in international markets, due to various worldwide political and economic factors that can easily affect these markets. Although foreign markets are more volatile, professional managers are generally able to help investors limit risk by closely analyzing market developments and by hedging against currency exchange rates.

International bond funds come in four main types: single country, single region, global, and foreign. Global international bond funds include U.S. bonds while foreign do not. Investors also have the option of investing in industry and sector international bond funds, which include utilities, government, and telecommunications.

Other international bonds invest in emerging market bonds. These types of bonds have greater risk, but just like investing in a start-up company, can also have higher rewards. While these types of markets have risks similar to regular international bonds, they are more susceptible to risks associated with their smaller size, lesser liquidity, and high inflation rates.

The main benefit for investing internationally is diversification. If interest rates in the U.S. are low, they may rise in other countries around the world. If they are high in the U.S., they may be lower elsewhere. By investing both nationally and internationally, investors prevent themselves from putting all their retirement investments in one basket.

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