How can you improve your chances when investing in bonds?

Question

What will be an ideal response?

Answer 1

Answer: As with investing in common stock, investing in bonds should be preceded by establishing goals. This will determine your asset allocation and how much of your savings should go into bonds.
For the sake of diversification, don't discount the value of holding some bonds. Their lower interest rates may seem boring when the stock market is riding high, but you'll appreciate them when they slow the downward spiral of your portfolio during a market downturn.
Understand taxes and bonds. While the tax-free nature of municipal bonds is great, bonds aren't of value to everyone. Compute the equivalent taxable yield for your tax bracket before you choose them. If you are in a low bracket, you may find that you can earn enough interest with taxable alternatives to pay the taxes and still come out ahead. If you are attempting to avoid state income tax, buy municipals issued by your state of residence.
Be aware of the potential downside of bonds. Consider how you would react if interest rates rose and the value of your bonds dropped, and also keep in mind the fact that shorter-term bonds drop less in price when interest rates climb. Let's face it: Interest rates are at historical lows, as of 2015, but someday they're going to rise.