Investing in Bonds For Dummies. Russell Wild
“real returns” (after-inflation returns) that some bonds have been offering.
In this book, you discover the mistakes that many bond investors make, the traps that some wily bond brokers lay for the uninitiated, and the heartbreak that can befall those who buy certain bonds without first doing their homework. (Don’t worry – I walk you through how to do your homework.) You find out how to mix and match your bonds with other kinds of assets – such as stocks and real estate – taking advantage of the latest in investment research to help you maximize your returns and minimize your risk.
Here are some of the things that you need to know before buying any bond or bond fund – things you’ll know after you read this book:
✔ What’s your split gonna be? Put all your eggs in one basket, and you’re going to wind up getting scrambled. A key to successful investing is diversification. Yes, you’ve heard that before – so has everyone – but you’d be amazed how many people ignore this advice!
Unless you’re working with really exotic investments, the majority of most portfolios is invested in stocks and bonds. The split between those stocks and bonds – whether you choose an 80/20 (aggressive) portfolio (composed of 80 percent stocks and 20 percent bonds), a 50/50 (balanced) portfolio, or a 20/80 (conservative) portfolio – is very possibly the single most important investment decision you’ll ever make.
✔ What kind of bonds do you want? Depending on your tax bracket, your age, your income, your financial needs and goals, your need for ready cash, and a bunch of other factors, you may want to invest in Treasury, corporate, agency, or municipal bonds. Within each of these categories, you have other choices to make: Do you want long-term or short-term bonds? Higher-quality bonds or higher yielding bonds? Freshly issued bonds or bonds floating around on the secondary market? Bonds issued in the United States or bonds from Mexico or Brazil?
✔ Where do you shop for bonds? Although bonds have been around more or less in their present form for hundreds of years, the way they are bought and sold has changed radically in recent years. Bond traders once had you at their tender mercy. You had no idea what kind of money they were clipping from you every time they traded a bond, allegedly on your behalf. That is no longer so. Whether you decide to buy individual bonds or bond funds, you can now determine almost to the dime how much the hungry middlemen intend to nibble – or have nibbled from your trades in the past.
✔ What kind of returns can you expect from bonds, and what is your risk of loss? Here is the part of bond investing that most people find most confusing – and, oh, how misconceptions abound! (You can’t lose money in AAA-rated bonds? Um … How can I break this news to you gently?) I explain the tricky concepts of duration and yield. I tell you why the value of your bonds is so directly tied to prevailing interest rates – with other economic variables giving their own push and pull. I give you the tools to determine just what you can reasonably expect to earn from a bond, and under what circumstances you may lose money.
Foolish Assumptions
I assume that you are intelligent, that you have a few bucks to invest, and that you have a basic education in math (and maybe a very rudimentary knowledge of economics) – that’s it.
In other words, even if your investing experience to date consists of opening a savings account, balancing a checkbook, and reading a few Suze Orman columns, you should still be able to follow along. Oh, and for those who are already buying and selling bonds and feel completely comfortable in the world of fixed income, I’m assuming that you, too, can learn something from this book. (Oh? You know it all, do you? Can you tell me what a sukuk is, or where to buy one, huh? See Chapter 3!)
Icons Used in This Book
Throughout the book, you’ll find little cartoons in the margins. In the Dummies universe, these are known as icons, and they signal certain (we hope) exciting things going on in the accompanying text.
Beyond the Book
In addition to all the material you can find in the book you’re reading right now, this product also comes with some access-anywhere goodies on the web. Check out the eCheat Sheet at www.dummies.com/cheatsheet/investinginbonds for helpful insights and details about the history of war bonds, collecting unusual bonds, using CUSIP to identify bonds, and how to calculate your minimum required distribution (MRD) in retirement.
And check out www.dummies.com/extras/investinginbonds for some more free extra content. There you’ll find articles on such topics as how the Fed moves interest rates, buying a primary or secondary bond issue, choosing between index funds and active mutual funds, and matching your portfolio to your longevity.
Where to Go from Here
Where would you like to go from here? If you want, start at the beginning. If you’re mostly interested in municipal bonds, hey, no one says that you can’t jump right to Chapter 8. Global bonds? Go ahead and jump to Chapter 9. It’s entirely your call. Maybe start by skimming the index at the back of the book.
If you’ve ever read one of these black and yellow For Dummies books before, you know this is not a book you need to read from front to back, or (if you’re reading the Chinese or Hebrew edition) back to front. Feel free to jump back and forth in order to glean whatever information you think will help you the most. No proctor with bifocals will pop out of the air, Harry Potter–style, to test you at the end. You needn’t commit it all to memory now – or ever. Keep this reference book for years to come as your little acorn of a bond portfolio grows into a mighty oak.
Part I
Bond Apetit!
In this part …
✔ Check out the bottom-line basics of bonds and bond fundamentals
✔ Get interested in interest, find out all about yield, and get the scoop on total return
✔ Study the different types of bonds: savings bonds, Treasury bonds, corporate bonds, agency bonds, municipal bonds, and more
Chapter 1
The Bond Fundamentals
In This Chapter
▶ Getting a handle on the nature of bonds
▶ Knowing why some bonds