Make Your Money Hustle: Bond Investing

Bonds can be confusing, but we’re here to simplify them.

Here’s the TL;DR:

• Bonds are loans you give to companies or governments who pay you back with interest.
• Bonds generally earn more return than high-yield savings accounts while taking on less risk than stocks.
• Bonds can be bought through several sources, including a broker, the U.S. government, or a diversified ETF like the multiple bond portfolios offered by Betterment.

Congrats—you made it past the TL;DR. Next, we’ll dive deeper into how bonds may be able to bring balance to your investments, filling the gap between cash and stocks.

In just a few minutes, you’ll walk away knowing:

• The basics of bonds
• The benefits of investing in bonds
• An easy way to buy bonds

As interest rates begin to drop, bonds may be a good way to earn extra yield.

The basics of bonds

No need to read a book about bonds—here are three Q&As that give you the basics.

Question 1: What is a bond?

Answer: A bond is basically a loan that you provide to an entity such as a business or government that wants to raise money. You can buy and hold a bond directly from the issuer (e.g. buying US Treasury bonds from TreasuryDirect) or choose to buy and sell bonds on the secondary market (e.g. an online broker).

Question 2: How does a bond work?

Answer: After you “loan” your money to the entity issuing the bond, they agree to:

• Pay back your principal: The issuer promises to pay your initial money back, aka your principal, by a specified date called the bond’s maturity.
• Pay you interest: You’ll receive periodic interest payments based on the annual interest rate paid on a bond, called the coupon rate. These interest payments are either distributed to you or reinvested into your investment on a consistent schedule.

Question 3: Are there risks to bond investing?

Answer: Generally, bonds are less risky than stocks, but that doesn’t mean they are without risk. Examples of these risks include:

• Credit risk: There’s a chance that a bond issuer won’t pay you back.
• Interest rate risk: There is a chance that the value of the bond will go down as interest rates go up. Long-term bonds have greater interest rate risk than short-term bonds.

Most bonds are rated based on the bond issuer’s financial strength and ability to pay a bond’s principal and interest.

Like stock investments, bonds with less risk offer less potential for return (aka lower yields). Less risky bonds include higher-quality bonds (more likely to be paid on time) or bonds with shorter maturities (length until full repayment).

The benefits of investing in bonds

For investors looking to put some of their cash to work but not wanting to go all-in on the stock market, here are three benefits that bonds can offer, making them complementary to cash and stock.

1) Bonds can help you avoid market volatility

Unlike stocks, bonds don’t represent a share of ownership in a company. Because of this, you won’t see the value of a bond increase as much as a stock when a company grows, but you generally also won’t see it decrease as much as a stock when a company struggles.

2) Bonds can help you preserve wealth

Bonds, especially short-maturity bonds, can be a good choice to help preserve your money while potentially earning more return than cash in a traditional savings account, money market account, or CD.

3) Bonds can help you generate income

Because the entity issuing a bond typically pays the bondholder interest on some regular schedule, they can help generate consistent income with less risk than stock investing.