Investing in Bonds: What You Need to Know
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Here's your money briefing for Tuesday, October 10th. I'm J.R. Whelan for The Wall Street Journal. Your everyday investors often turn to stocks and mutual funds to build a portfolio. But now that interest rates are rising, more investors are taking a second look at bonds.
The Federal Reserve's rate hiking campaign have made bonds extremely attractive right now. They are yielding higher than they have in years. And so you can actually get a return on having a bond where in the past you couldn't.
But how do bonds actually work and what are the risks to watch out for? We'll talk with our personal finance reporter, Oyen Atadoyen, about it after the break.
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More individual investors are adding bonds to their portfolios along with stocks. Wall Street Journal personal finance reporter Oyin Adedoyin joins me to explain why. So, Oyin, first of all, help us understand the basics for a moment.
What’s driving renewed interest in bonds as rates rise?
What's the difference between a stock and a bond?
With a stock, you're buying a piece of a company. But with a bond, you are essentially offering a company or an entity a loan with the expectation that they're going to pay it back at some point.
Why are they so attractive to investors now?
The Federal Reserve's rate hiking campaign have made bonds extremely attractive right now. They are yielding higher than they have in years. And so you can actually get a return on having a bond where in the past you couldn't.
Yeah, you mentioned the yield. We often hear about bond yields and why they're important to investors. But what is a yield?
A yield is that annual rate of return that should be expected in a bond. And so yields are at like upwards of 5% right now for bonds, depending on the maturity. And that is basically how much money you should expect back on your bond.
How does somebody invest in bonds?
There's different ways to invest in a bond. Nowadays, technology has made it a lot easier to invest through a brokerage like Charles Schwab or Vanguard. People can also invest in treasury bonds, which are backed by the U.S. government. And they can do that directly through a government site called Treasury Direct.
What kinds of bonds are typically available to individual investors?
I mentioned treasuries earlier, which come in different durations. So you can get anything from a two-year to a five-year to a 10-year on treasuries. But there are other types of bonds, too. There are corporate bonds, which are issued by different companies. And there are also municipal bonds, which are issued by states or counties. And these entities issue those types of bonds to raise money from investors.
Is there anything in the fine print with bonds that people should be aware of?
Financial advisors told me that people need to pay attention to a few things when it comes to bonds. People should pay attention to the duration, how long a bond is. And that is because bonds that are held longer are usually more risky because there's more of a chance that that entity, whether it's that company or that government, will default on that loan that they owe you.
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