Why Bonds Still Appeal Despite Today's Superlow Interest Rates
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Here's your money briefing for Tuesday, April 27th. I'm J.R. Whelan for The Wall Street Journal. All this week, we're helping new investors understand some common investment assets and the role they play in a healthy portfolio. When people talk about investing, they often say stocks and bonds, like ketchup and mustard, salt and pepper. Stocks can have high rewards, but also potential risk. Bonds are more stable and generally bring in lower returns, but they have some other benefits you might not have thought of.
I think the main reason why people usually buy bonds is they want that regular interest payment. It's a sort of guaranteed or close to guaranteed income stream that you might not get with a stock.
Today in our Investment Week series, our markets reporter Sam Goldfarb will walk us through the basics of bonds. That's after the break.
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Stocks have been hitting record highs, but sudden market drops can wipe away holdings in a flash. That's where bonds come in.
How does this episode introduce bonds and their role in a portfolio?
They can be a guardrail to protect against sharp moves in the market. Sam Goldfarb covers the bond market for us, and he's here to talk about the basics. Sam, thanks for being with us. Thank you. So, Sam, why do investors like bonds, and what role do they play in an overall portfolio?
You probably have heard about how like when you're younger, maybe you should own more stock, have more stocks in your portfolio. And when you get older, you can kind of gradually shift more towards bonds because bonds are not completely safe, but they tend to be less volatile than stocks. And so when you're younger, you can afford to sort of ride out the ups and downs of the stock market. But when you're older, that can be not as easy. And bonds, you know, as I said, will tend to offer 3%, 2%, 5% interest rates. And so that's their main appeal. They don't offer as much upside of stocks, but they tend to have less downside.
Okay, so let's go to the basics. What even is a bond?
A bond is basically a way of making a loan. So if you buy a bond, you're making a loan, whether it be to a government, a business. And it's basically, instead of a bank making a loan, a bond allows lots of people around the world potentially to make a little piece of that loan. Basically, when you buy a bond, you're getting a regular interest payment. And then you will get that paid back at maturity. So if it's a five-year bond, you'll be paid $500 for the bond. You'll get your $500 back in five years if it's a five-year bond. And in the meantime, you'll get regular interest payments, like maybe 5% of the principal. I think the main reason why people usually buy bonds is they want that regular interest payment.
It's a sort of guaranteed or close to guaranteed income stream that you might not get with a stock. On the other hand, bonds do trade in the secondary market like stocks do, and they can go up and down in price. So it's possible to make money from bonds because bond prices have gone up.
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