Bonding with Your Finances: A Beginner's Guide to Understanding Bonds

Are you looking to diversify your investment portfolio while nearing or in retirement but unsure where to start? It may be time to learn about bonds, alternative investments, Real Estate trust, and more. In this article though let’s begin by talking about some fundamentals of bonds.

These financial investments offer the opportunity to lend your money in exchange for interest, which can help provide a stream of income from your assets to help fund your living expenses. 

Join us as we learn more below.  We discuss benefits, risks, and why they can be more important than ever in today's market. Whether you're a seasoned investor or just starting out, understanding bonds is valuable to building a financial plan.

What exactly is a bond?

Think of a bond as a way to lend your money in exchange for interest. Unlike stocks, where you own a piece of a company, bonds are debt instruments given out by either a corporation or the government. It's like handing out an IOU with a promise to repay the principal amount along with interest over a specified period.  A stock is ownership in a company while a bond is more of you owe me money plan.

Now, you might wonder, why should bonds be a part of your investment portfolio? I thought Stocks get more returns…

Well, historically, bonds have been a crucial component of a diversified investment strategy which is important to have while we are taking money out of your investments to live on.   They tend to have a “low correlation” with stocks, meaning when one goes up, the other may go down, which provides an added cushion against market swings (ups and downs).  However, in recent years, especially 2022, we have seen some challenges for bonds, so it's essential to assess how they fit into your unique financial situation though.

Is the bond market big?

Surprising to most, the bond market is even larger than the stock market in terms of total size and value. 

Is there a difference between corporate bonds and government bonds?

Government bonds (for example; United States Treasury bonds) are generally considered safer because they're backed by the government, reducing the risk of default compared to corporate bonds.  Corporate bonds usually need to pay a higher interest rate to the person loaning them money than government bonds as the risk of default is lower for a government bond.

If you're unsure about how bonds fit into your financial plan, don't worry! We're here to help. Our team of experienced Certified Financial Planners offers complimentary, no-pressure appointments to evaluate your financial situation and provide tailored advice. Let's navigate the world of bonds together and strive to secure your financial future. Schedule your appointment with a fiduciary advisor today.

Disclosures:

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. AI (artificial Intelligence) sourced articles may be prone to error, due to the vast information they assemble from the internet. Always confirm any questions or concerns you may have with an experienced professional. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price

Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses 

Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value

Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Stock investing includes risks, including fluctuating prices and loss of principal

Asset allocation does not ensure a profit or protect against a loss.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk

Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company

All investing involves risk including loss of principal. No strategy assures success or protects against loss