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

Speaker 1 I live in LA now, but lately I have been craving the seasons. Snow, hot cocoa, the whole thing.

Speaker 1 I don't even ski, but I have been daydreaming about working remotely from somewhere really cozy on the East Coast, like a cute little ski town for a little bit.

Speaker 1 And whenever I know I'm going to be gone for a while, I always remind myself that my home can actually be working for me while I'm away because I host my space on Airbnb.

Speaker 1 It is one of the easiest ways to earn passive income from something you already have, and that extra income feels particularly helpful this time of year as we approach the holidays. holidays.

Speaker 1 A lot of my friends say that sounds amazing, but where do you find the time to manage guests and bookings? And that's when I tell them about Airbnb's co-host network.

Speaker 1 Through Airbnb, you can find a local co-host who can help you set up your listing, handle reservations, communicate with guests, provide on-site support, even help with design and styling.

Speaker 1 I like to give a personal touch when I'm hosting on Airbnb. So I make a list of my favorite restaurants in the area and I hand write a note welcoming my guests to the property.

Speaker 1 My guests love it, but I also know that some of those little personal touches can take a lot of extra time. So this is the exact kind of thing that you would want your co-host to help you with.

Speaker 1 Whether you're traveling for work or chasing the snow or escaping it, or you've got a second place that just sits there empty more often than you'd like, your home doesn't have to just sit there.

Speaker 1 You can make extra money from it without taking on extra work. Find a co-host at airbnb.com slash host.

Speaker 2 Here's one piece of advice that I've given for years. Build an emergency fund.
Aim to stash away enough to cover at least three months of expenses in case your income suddenly drops.

Speaker 2 Sounds simple, right? But let's be honest, it's not. Saving even one month's worth of living costs can feel impossible.

Speaker 2 Just when you're making progress, that check engine light blinks on and derails your plans. Life already throws enough curveballs.
You don't need your bank adding to the chaos.

Speaker 2 That's why it's so important to choose one that makes savings easy and doesn't nibble away at your hard-earned money with ridiculous fees. Chime understands that every every dollar counts.

Speaker 2 That's why when you set up direct deposit through QIIME, you get access to fee-free features like free overdraft coverage, getting paid up to two days early with direct deposit, and more.

Speaker 2 With qualifying direct deposits, you're eligible for free overdraft up to $200 on debit card purchases and cash withdrawals. To date, QIIME has spotted members over $30 billion.

Speaker 2 Work on your financial goals through QIIME today. Open an account in just two minutes at chime.com/slash MNN.
That's chime.com/slash MNN. Chime feels like progress.

Speaker 3 Chime is a financial technology company, not a bank. Banking services and debit card provided by the Bank Bank NA or Stripe Bank NA.
Members of DIC.

Speaker 3 Spot me eligibility requirements and overdraft limits apply. Timing depends on submission of payment file.

Speaker 3 Fees apply at out-of-network ATMs, bank ranking, and number of ATMs, according to US News and World Report 2023. Chime, checking account required.

Speaker 2 Here's one piece of advice that I've given for years: build an emergency fund. Aim to stash away enough to cover at least three months of expenses in case your income suddenly drops.

Speaker 2 Sounds simple, right? But let's be honest, it's not. Saving even one month's worth of living costs can feel impossible.

Speaker 2 Just when you're making progress, that check engine light blinks on and derails your plans. Life already throws enough curveballs.
You don't need your bank adding to the chaos.

Speaker 2 That's why it's so important to choose one that makes savings easy and doesn't nibble away at your hard-earned money with ridiculous fees. QIIME understands that every dollar counts.

Speaker 2 That's why when you set up direct deposit through QIIME, you get access to fee-free features like free overdraft coverage, getting paid up to two days early with direct deposit, and more.

Speaker 2 With qualifying direct deposits, you're eligible for free overdraft up to $200 on debit card purchases and cash withdrawals. To date, QIIME has spotted members over $30 billion.

Speaker 2 Work on your financial goals through QIIME today. Open an account in just two minutes at chime.com/slash MNN.
That's chime.com slash MNN. Chime feels like progress.

Speaker 3 Chime is a financial technology company, not a bank. Banking services and debit card provided by the Bankor Bank NA or Stripe Bank NA.

Speaker 3 Members, FDIC, spot me eligibility requirements and overdraft limits apply. Timing depends on submission of payment file.

Speaker 3 Fees apply at out-of-network ATMs, bank ranking, and number of ATMs according to US News and World Report 2023. Chime checking account required.

Speaker 2 I'm Nicole Lapin, the only financial expert you don't need a dictionary to understand.

Speaker 1 It's time for some money rehab.

Speaker 1 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.

Speaker 1 If you're looking for for a way to earn passive income with lower risk than stocks, bonds might be your new best friend.

Speaker 1 Today I'm talking to a money rehabber who wants to start investing in bonds, but isn't sure where to start.

Speaker 1 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.

Speaker 1 Sierra, welcome to Money Rehab. So what's your question?

Speaker 4 I've been investing for a couple of years now and I'm starting to see steady growth in my portfolio. That's awesome.

Speaker 4 Yeah, but that really bad day in the market the other day made my portfolio drop and that really freaked me out.

Speaker 4 I've heard you say on the show before that it's important to diversify, but I'm only invested in stocks right now.

Speaker 4 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. Oh, great.

Speaker 1 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.

Speaker 1 Have you been picking individual stocks or investing in equity funds?

Speaker 4 A little bit of both, but mostly funds.

Speaker 1 Awesome. How much do you have invested?

Speaker 4 I have about 75,000 in my portfolio.

Speaker 1 And you have no bonds?

Speaker 4 Girl. I know.

Speaker 1 It's totally okay. We can fix this.
How old are you, by the way?

Speaker 4 I'm 27. Okay.

Speaker 1 Well, good for you for starting so early. I love to hear that.

Speaker 1 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 you see some people phase those out and opt into more bonds as they get older because they're more steady.

Speaker 1 So let's talk about financial goals. Are you invested for retirement, passive income, something else?

Speaker 4 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.

Speaker 4 So I just want to grow my net worth.

Speaker 1 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.

Speaker 1 So have you started thinking about how bonds might fit into your portfolio?

Speaker 4 Not really. I'm open to just generally learning more.

Speaker 1 Cool. So essentially, a bond is an IOU.
Most people know that the U.S. government issues bonds, but so do other governments, municipalities, and companies.
We have to talk about U.S.

Speaker 1 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?

Speaker 4 Yeah, love it. Great.

Speaker 1 So, treasuries are bonds issued by the U.S. government, which makes them one of the safest investments out there.

Speaker 1 Because if the US government goes down, we have more to be concerned about than our bond investments. It's just zombie apocalypse stuff.

Speaker 1 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 two and 10 years.

Speaker 1 And then, for the long haul, there are T bonds, and they mature in 20 or 30 30 years. Any questions about that?

Speaker 4 I guess my question would be, how do you choose which one?

Speaker 1 Well, that's going to be very personal based on your goals, but I can tell you what I do.

Speaker 1 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.

Speaker 1 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.

Speaker 1 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?

Speaker 4 Yeah, that makes sense.

Speaker 1 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.

Speaker 1 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.

Speaker 1 I mean, some people level up on this strategy through treasury ladders. Have you heard of that term before?

Speaker 4 I don't think so.

Speaker 1 A treasury ladder is when you buy treasuries with different maturity. So you always have bonds maturing and paying you out.

Speaker 1 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.

Speaker 1 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.

Speaker 4 Okay, cool.

Speaker 4 How do I do that?

Speaker 1 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 I want to talk about corporate bonds.

Speaker 1 Corporate bonds work the same way as treasuries do, except you're lending money to a company instead of the government. There are literally thousands of companies that do this.

Speaker 1 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.

Speaker 4 I didn't know you could do that.

Speaker 1 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.

Speaker 1 Corporate bonds tend to pay higher higher yields than treasuries, not always, but that's the general trend. But that's because corporate bonds come with more risk.

Speaker 1 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.

Speaker 1 Agencies like Moody's rate corporate bonds based on how risky they are. It's sort of like our credit scores as individuals, but for companies.

Speaker 4 So what's a good rating?

Speaker 1 Great question. Triple A is the safest, while lower-rated bonds, double B and and below, are riskier, but they might offer higher returns.

Speaker 1 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.

Speaker 1 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.

Speaker 1 Some corporate bonds are heavily traded, while others might be harder to sell.

Speaker 1 So if something has a low liquidity score, you might not be able to melt that that bond into cash, so to speak, when you need it.

Speaker 4 Low liquidity means it's harder to turn into cash.

Speaker 1 Essentially, yes. And then some corporate bonds are callable, meaning that a company can pay them off early.

Speaker 1 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.

Speaker 4 Okay.

Speaker 1 So let's circle back to you. Now that we've got the basics covered, how are you feeling?

Speaker 4 I'm feeling good.

Speaker 4 I feel like I have all the information I need about my options, but I'm not sure exactly how much to buy.

Speaker 1 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.

Speaker 1 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.

Speaker 4 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.

Speaker 1 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.

Speaker 1 So when we were talking, I went on my public account to look at treasury yields.

Speaker 1 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.

Speaker 1 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.

Speaker 1 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.

Speaker 1 You can sign up for an account if you want at public.com slash money rehab.

Speaker 4 I actually already have a public account. I just haven't looked at the bond stuff.
So I'll check that out.

Speaker 1 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.

Speaker 1 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.

Speaker 1 Open your account today at public.com/slash moneyrehab. This is a paid endorsement for public investing.
Full disclosure and conditions can be found in the podcast description.

Speaker 2 Money Rehab is a production of Money News Network. I'm your host, Nicole Lapin.
Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes.
Do you need some money rehab?

Speaker 2 And let's be honest, we all do.

Speaker 2 So email us your money questions, moneyrehab at moneynewsnetwork.com, to potentially have your questions answered on the show or even have a one-on-one intervention with me.

Speaker 2 And follow us on Instagram at MoneyNews and TikTok at Money News Network for exclusive video content. And lastly, thank you.
No, seriously, thank you.

Speaker 2 Thank you for listening and for investing in yourself, which is the most important investment you can make.