A back-to-school adulting series
Bonds have a reputation for being the investment choice for older people, rich people and for those fond of buying savings bonds for children as gifts.
But some may wonder, what exactly is a bond? And why should you care?
The simple answers:
A bond is a loan.
People who buy them are loaning money for a specified period of time — the maturity date — to a company or government entity. In return, the issuer promises to make regular interest payments to the bondholder and return the original investment amount when the bond matures.
So you should get the money back with interest — although rates vary.
Why buy bonds?
In general, bonds are considered to be a safer investment than stocks.
An investment in stocks will rise and fall and could possibly lose all of its value. Bonds provide a steady, predictable stream of income and a (pretty solid) guarantee that all of the principal will be returned one day. (We won’t touch on the riskier junk bonds today.)
The big disadvantage is that over the long term, bonds will almost always return less than stocks. That’s why financial advisers have mixed opinions on whether bonds make sense for younger investors.
“A person under the age of 30 doesn’t need much bonds, but there are reasons they should have some,” said Nancy Skeans, CEO of Schneider Downs Wealth Management Advisors, Downtown.
One good reason for owning bonds is if the stock market were to plunge, the bond portion of the portfolio should remain steady. A newer investor could cash out some or all of the bonds without selling stocks that had fallen in value.
Because bonds don’t typically appreciate by double digits as stocks do, investors who liquidate their bonds also are less likely to suffer any significant tax consequences.
If I do buy bonds, how much?
Ms. Skeans said her firm typically recommends a person younger than 30 have a portfolio of 80% stocks and 20% bonds. That would mean someone with $1,000 to invest would allocate $200 to bonds and put the rest in the stock market.
But opinions vary.
One rule of thumb states that individuals should hold a percentage of stocks equal to 100 minus their age. So, a typical 30-year-old investor would have 30% of his portfolio in bonds and 70% percent in stocks. By age 100, all of the portfolio would be invested in bonds.
In recent years as the stock market has soared to record levels, some advisers have begun suggesting a more aggressive formula of 120 minus age or 130 minus age. In the latter example, anyone younger than age 30 would have zero bonds in their portfolio.
How do you buy bonds?
Bonds issued by corporations raising money to buy equipment or build plants can be purchased with the help of a financial adviser or an online stockbroker such as TD Ameritrade or E-Trade. Bonds issued by the federal government can be bought directly with no commission costs from the U.S. Treasury through TreasuryDirect.com.
Bottom line?
Over the long term, the reality is that stocks are the better investment vehicle for beating inflation and maintaining purchasing power — crucial for someone younger, said Adam Yofan, an adviser at Buckingham Strategic Wealth, Downtown.
“However, bonds — specifically high-quality bonds and lower-duration bonds — help minimize portfolio volatility,” he said.
Mr. Yofan said a portfolio of bonds could end up saving the day for newer investors who are trying to buy a house and the stock market suddenly goes south. He believes it’s good to “have something like a bond to sell in the event of a market decline.”
Tim Grant: tgrant@post-gazette.com.
First Published: September 10, 2019, 3:00 p.m.
Updated: September 10, 2019, 3:14 p.m.
