Flexibility, stability, and liquidity
Adding short-term bonds to your portfolio is important as they can serve as a safety net. Short-term bonds generally provide a steady income stream, which can help balance riskier investments like stocks. Imagine you've got a mix of high-growth tech stocks and a few short-term bonds. If the market takes a dip, those bonds can act as a cushion, helping stabilize your overall returns. Plus, short-term bonds are incredibly flexible since their shorter maturity periods mean you don't have to wait decades to access your money. This is perfect if you have a short-term investment goal or want to have cash handy for investment opportunities that might come your way. For instance, if you buy a U.S. Treasury bill (T-bill) that matures in six months, you'll have your principal back quickly and can reinvest it or use it for other needs.
Tax benefits
For those wanting to maximize tax benefits, certain short-term bonds, like municipal bonds, offer unique advantages. Interest earned on these bonds is often exempt from federal income tax and, in many cases, state and local taxes. Let's say you're in a higher tax bracket and invest in a municipal bond offering a modest interest rate. Because you're not paying taxes on that interest, your effective return could be higher than what you'd earn from a taxable bond at the same rate.
