Bonds 101: How to Add Stability (and Income!) to Your Portfolio

Summary

Podcast Summary: Money Rehab with Nicole Lapin

Episode Title: Bonds 101: How to Add Stability (and Income!) to Your Portfolio
Host: Money News Network (Nicole Lapin)
Release Date: March 20, 2025

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Introduction to Bonds

In the latest episode of Money Rehab with Nicole Lapin, host Nicole dives into the often-overlooked world of bonds, aiming to demystify how they can enhance portfolio stability and generate passive income. Recognizing that many investors prioritize stocks for their excitement and potential high returns, Nicole emphasizes the importance of bonds in achieving a balanced and resilient investment strategy.

Nicole Lapin [00:02]:
"When it comes to investing, a lot of people think about stocks first. And hey, I totally get it. Stocks are very exciting. But bonds, Bonds do deserve a little bit more love."

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Guest Introduction: Sierra’s Investment Journey

Nicole welcomes Sierra, a listener eager to incorporate bonds into her investment portfolio. Sierra has been actively investing in stocks and equity funds, amassing a portfolio worth approximately $75,000. However, a recent market dip significantly impacted her portfolio, highlighting the volatility inherent in stock investments and prompting her to consider diversification through bonds.

Sierra [00:48]:
"I've been investing for a couple of years now, and I'm starting to see steady growth in my portfolio."

Nicole Lapin [00:53]:
"That's awesome."

Sierra [00:54]:
"Yeah, but that really bad day in the market the other day made my portfolio drop and that really freaked me out. I've heard you say on the show before that it's important to diversify, but I'm only invested in stocks right now, so everything that happened with that market dip is making me feel like I should really probably consider bonds more seriously and actually start diversifying."

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Understanding Diversification and Bonds

Nicole commends Sierra for recognizing the importance of diversification and introduces the concept of bonds as a viable alternative to stocks for reducing portfolio risk and generating steady income.

Nicole Lapin [01:12]:
"I love that you're thinking about diversification."

She explains that diversification is akin to not putting all eggs in one basket, a strategy to mitigate risks by spreading investments across various asset classes.

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What Are Bonds?

Nicole breaks down the fundamentals of bonds, explaining them as IOUs issued by governments, municipalities, or corporations. She distinguishes between U.S. Treasury bonds and corporate bonds, the latter often being less understood but equally important.

Nicole Lapin [02:38]:
"So essentially a bond is an iou. Most people know that the US government issues bonds, but so do other governments, municipalities and companies."

Types of U.S. Treasury Bonds

1. Treasury Bills (T-Bills):
   Short-term bonds that mature in a year or less.

2. Treasury Notes (T-Notes):
   Medium-term bonds maturing between 2 and 10 years.

3. Treasury Bonds (T-Bonds):
   Long-term bonds with maturities of 20 to 30 years.

Nicole Lapin [02:56]:
"Treasuries are bonds issued by the US government, which makes them one of the safest investments out there."

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Choosing the Right Treasury Bond

Nicole advises that selecting the appropriate Treasury bond depends on personal financial goals, particularly the investment horizon and when the funds will be needed.

Nicole Lapin [03:32]:
"Well, that's going to be very personal, based on your goals... if you wanted to buy a house in the next two years, for example, I wouldn't put my entire savings into a 30 year bond because I would need it in two years."

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Treasury Ladder Strategy

Introducing the Treasury ladder strategy, Nicole explains how investors can create a steady income stream by purchasing Treasury bonds with varying maturities.

Nicole Lapin [04:24]:
"A Treasury ladder is when you buy Treasuries with different maturities. So you always have bonds maturing and paying you out."

Example:

• Purchase a 1-year, 3-year, and 5-year Treasury bond.
• As each bond matures, reinvest the proceeds into a new 5-year bond, ensuring continuous income and reinvestment.

Sierra [04:48]:
"Okay, cool. How do I do that?"

Nicole Lapin [04:51]:
"Let's put a bit in that one for a sec too, because I'll tell you how to do all of this once we go through your options."

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Corporate Bonds Explained

Nicole shifts focus to corporate bonds, highlighting their differences from Treasury bonds, particularly in terms of yield and risk.

Nicole Lapin [05:15]:
"Corporate bonds work the same way as Treasuries do, except you're lending money to a company instead of the government."

She underscores that corporate bonds typically offer higher yields compared to Treasuries but come with increased risk, as corporate stability can vary.

Sierra [05:17]:
"I didn't know you could do that."

Nicole Lapin [05:49]:
"AAA is the safest, while lower rated bonds, double B and below are riskier. But they might offer higher returns."

She explains the importance of credit ratings in assessing the risk associated with corporate bonds, comparing them to individual credit scores.

Nicole Lapin [06:28]:
"Low liquidity means it's harder to turn into cash."

Additionally, Nicole discusses callable bonds, which allow companies to redeem bonds before maturity, potentially disrupting expected interest payments.

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Portfolio Allocation and Strategy

Returning to Sierra’s situation, Nicole suggests a rule of thumb for bond allocation based on age—allocating a percentage of the portfolio to bonds equivalent to one’s age. For Sierra, at 27 years old, this would mean:

• 27% in Bonds
• 73% in Equities/Stocks

Nicole Lapin [07:04]:
"One common way investors start allocating their portfolios is just by taking their age and making that percentage of their portfolio invested in bonds."

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Practical Steps to Invest in Bonds

Nicole recommends using the platform Public.com to invest in both Treasury and corporate bonds, citing its accessibility and the ability to set up Treasury ladders.

Nicole Lapin [07:33]:
"Public makes bond investing super, super accessible. You can invest in both corporate bonds and Treasuries on public."

She also mentions a bond fund on Public.com currently earning a 6.6% annual yield, emphasizing the benefits of locking in rates despite potential Federal Reserve rate changes.

Sierra [08:20]:
"Have a public account. I just haven't looked at the bond stuff. So I'll check that out."

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Conclusion and Call to Action

Nicole wraps up the episode by encouraging listeners ready to invest in bonds to visit Public.com, highlighting a promotional bonus for transferring retirement accounts. She reiterates the importance of diversification through bonds for long-term financial well-being and invites listeners to engage with the show for personalized financial advice.

Nicole Lapin [08:25]:
"For today's tip, you can take straight to the bank if you're ready to start investing in bonds. Public.com is my go to spot... this is a paid endorsement for Public Investing."

She concludes by inviting audience interaction through emails and social media, emphasizing the value of investing in one’s financial education and future.

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Key Takeaways:

• Bonds as a Diversification Tool:
  Bonds provide lower-risk investment options compared to stocks and can generate steady passive income, contributing to a more balanced investment portfolio.

• Types of Bonds:
  Understanding the differences between Treasury bills, notes, and bonds, as well as corporate bonds, is crucial for making informed investment decisions.

• Investment Strategies:
  Strategies like Treasury ladders can ensure continuous income and reinvestment opportunities, enhancing portfolio stability.

• Credit Ratings and Risks:
  Assessing the creditworthiness of corporate bonds through ratings can help mitigate risks associated with higher-yield investments.

• Practical Steps:
  Utilizing platforms like Public.com simplifies the process of investing in various bonds and implementing effective investment strategies.

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Money Rehab with Nicole Lapin continues to empower listeners with accessible financial advice, breaking down complex topics into actionable insights. Whether you’re a seasoned investor or just starting, understanding bonds can significantly enhance your financial strategy and stability.

Transcript

[Nicole Lapin]

I'm Nicole Lapin, the only financial expert. You don't need a dictionary to understand. It's time for some money rehab. When it comes to investing, a lot of people think about stocks first. And hey, I totally get it. Stocks are very exciting. But bonds, Bonds do deserve a little bit more love. If you're looking for a way to earn passive income with lower risk than stocks, bonds might be your new best friend. Today I'm talking to a money rehabber who wants to start investing in bonds but isn't sure where to start. We'll go over the basics, break down key terms, and figure out how bonds can fit into her financial goals. So let's get into it. Sierra, welcome to money rehab. So what's your question?

[Sierra]

I've been investing for a couple of years now, and I'm starting to see steady growth in my portfolio.

[Nicole Lapin]

That's awesome.

[Sierra]

Yeah, but that really bad day in the market the other day made my portfolio drop and that really freaked me out. I've heard you say on the show before that it's important to diversify, but I'm only invested in stocks right now, so everything that happened with that market dip is making me feel like I should really probably consider bonds more seriously and actually start diversifying.

[Nicole Lapin]

Oh, great. Okay, so there's a lot to talk about here. I love that you're thinking about diversification. So you're not invested in bonds, but you're invested in stocks. Have you been picking individual stocks or investing in equity funds?

[Sierra]

A little bit of both, but mostly funds.

[Nicole Lapin]

Awesome. How much do you have invested?

[Sierra]

I have about 75,000 in my portfolio.

[Nicole Lapin]

And you have no bonds?

[Sierra]

Girl, I know.

[Nicole Lapin]

It's totally okay. We can fix this. How old are you, by the way?

[Sierra]

I'm 27.

[Nicole Lapin]

Okay, well, good for you for starting so early. I love to hear that. And it is common for younger investors to focus on equities or stocks because equities have a reputation for delivering higher rewards than bonds. But they are higher risk, higher reward, which is why you see some people phase those out and opt into more bonds as they get older because they're more steady. So let's talk about financial goals. Are you invested for retirement? Passive income, Something else?

[Sierra]

I guess just overall financial well being. I don't have a particular goal in mind. I'm renting right now and we'll probably want to buy a house at some point, but that still feels kind of far off. So I just want to grow my net worth.

[Nicole Lapin]

Love it. Okay, so let's talk about diversification. If anyone listening doesn't know, diversification is the investing version of don't put all of your eggs in one basket. So have you started thinking about how bonds might fit into your portfolio?

[Sierra]

Not really. I'm open to just generally learning more.

[Nicole Lapin]

Cool. So essentially a bond is an iou. Most people know that the US government issues bonds, but so do other governments, municipalities and companies. We have to talk about U.S. bonds or treasuries because they're a really solid investment. But I also want to talk about corporate bonds because not enough people know about them. Sound good?

[Sierra]

Yeah, love it.

[Nicole Lapin]

Great. So Treasuries are bonds issued by the US government, which makes them one of the safest investments out there. Because if the US government goes down, we have more to be concerned about than our bond investments. It's just zombie apocalypse stuff. So they come in a few flavors. Treasury bills or T bills. And those are short term bonds that mature in a year or less. Then there are T notes. Treasury notes, they mature between 2 and 10 years. And then for the long haul there are T bonds and they mature in 20 or 30 years. Any questions about that?

[Sierra]

I guess my question would be how do you choose which one?

[Nicole Lapin]

Well, that's going to be very personal, based on your goals. But I can tell you what I do. I typically look at the yield, which is how you can determine how much you'll earn in interest from the bond investment if you keep invested until the bond fully matures. Typically I just want to earn as much money as I possibly can. But there are also other personal factors, like when you need the money back. If you wanted to buy a house in the next two years, for example, I wouldn't put my entire savings into a 30 year bond because I would need it in two years. You know what I mean?

[Sierra]

Yeah, that makes sense.

[Nicole Lapin]

So the yield on Treasuries is subject to change, obviously, but right now I'm seeing the range between 3.85 and 4.27%. I'll tell you where to find those in just a sec. But again, the big advantage to bonds is that you still are earning interest. It's just way lower risk and you can set it and forget it. I mean, some people level up on this strategy through treasury ladders. Have you heard of that term before?

[Sierra]

I don't think so.

[Nicole Lapin]

A Treasury ladder is when you buy Treasuries with different maturities. So you always have bonds maturing and paying you out. For example, you buy a one year, three year and five year treasury bond today when the one year Bond matures, you roll the money into a new five year bond. The next year, the three year bond matures, you do the very same thing. That way you're always keeping a steady stream of income coming in while you're also reinvesting.

[Sierra]

Okay, cool. How do I do that?

[Nicole Lapin]

Let's put a bit in that one for a sec too, because I'll tell you how to do all of this once we go through your options. But next, I want to talk about corporate bonds. Corporate bonds work the same way as Treasuries do, except you're lending money to A instead of the government. There are literally thousands of companies that do this. Big companies that you see in the headlines. Apple, Microsoft, Alphabet, the parent company of Google, Nvidia, Amazon. Even private companies that you can't buy on public markets.

[Sierra]

I didn't know you could do that.

[Nicole Lapin]

Yeah, so if you invest in funds, you're probably already invested in some of these companies anyway. But bonds are another way to do it. Corporate bonds tend to pay higher yields than Treasuries. Not always, but that's the general trend. But that's because corporate bonds come with more risk. If a company struggles, they might not be able to pay you back. But you can assess a company's credit worthiness through credit ratings. It's like their credit score agencies like Moody's, rate corporate bonds based on how risky they are. It's sort of like our credit scores as individuals bet for companies.

[Sierra]

So what's a good rating?

[Nicole Lapin]

Great question. AAA is the safest, while lower rated bonds, double B and below are riskier. But they might offer higher returns. Remember, lower risk, lower returns, higher risk, higher returns. So credit rating is definitely something to check out when you're choosing a corporate bond. And while you're doing your research, I'd also look at the bond's liquidity score and whether it's callable. The liquidity score tells you how easy it is to buy or sell the bond. Some corporate bonds are heavily traded, while others might be harder to sell. So if something has a low liquidity score, you might not be able to melt that bond into cash, so to speak, when you need it.

[Sierra]

Low liquidity means it's harder to turn into cash.

[Nicole Lapin]

Essentially, yes. And then some corporate bonds are callable, meaning that a company can pay them off early. This can be a downside for investors if interest rates drop, because the company might decide to call a bond and reissue new bonds at lower rates, leaving you without those interest payments. Okay, so let's circle back to you now that we've got the basics covered. How are you feeling?

[Sierra]

I'm feeling good. I feel like I have all the information I need about my options, but I'm not sure exactly how much to buy.

[Nicole Lapin]

That is really personal. Based on your goals. One common way investors start allocating their portfolios is just by taking their age and making that percentage of their portfolio invested in bonds. So for you, that would be 27% in bonds and 73% in equities or stocks. But again, you'll want to think about your specific goals and how bonds should play a role in helping you achieve those goals.

[Sierra]

Okay, so you mentioned you tell me where I should go to look at treasury yields and also how to set up a Treasury ladder.

[Nicole Lapin]

Uh, yes. So the place I do this is public. Public makes bond investing super, super accessible. You can invest in both corporate bonds and Treasuries on public. So when we were talking, I went on my public account to look at treasury yields. That's where I go to check to see what yields are available to me because public is the only place that I personally buy bonds. True story. Legit on public you can buy corporate bonds. You can set up a Treasury ladder. And there's also a bond fund right now that combines 10 investment grade and high yield corporate bonds. I have personally invested in that and right now the bond fund is earning 6.6% annual yield. And when you invest, you lock that rate in even if the Fed lowers rates. You can sign up for an account if you [e-mail] moneyrehab I actually already.

[Sierra]

Have a public account. I just haven't looked at the bond stuff. So I'll check that out.

[Nicole Lapin]

Oh amazing. Well, yes, do that. Let me know how it goes. Thank you. Of course, for today's tip, you can take straight to the bank if you're ready to start investing in bonds. Public.com is my go to spot. Plus, if you roll over a 401k or transfer an IRA to public, you can earn a bonus of up to $10,000. Open your account [e-mail] moneyrehab this is a paid endorsement for Public Investing. Full disclosure and conditions be found in the podcast Description. Money Rehab is a production of Money News Network. I'm your host Nicole Lapin. Money Rehab's executive producer is Morgan Lavoy. Our researcher is Emily Holmes. Do you need some Money Rehab? And let's be honest, we all do. So email us your money questions moneyrehaboneynewsnetwork.com to potentially have your questions answered on the show or even have a one on one intervention with me. And follow us on Instagramoneynews and TikTokoneyNewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.