Personal Investing: The Missing Manual

Chapter 7. Bonds

Many investors disparage bonds as conservative and boring income investments, and go out and search for more exciting opportunities with higher returns. Some safety-conscious investors give bonds too much credit and assume they’re risk free. The truth is somewhere in between—bonds can be conservative and a little boring, but they do come with risks. And some bonds are riskier than others.

Bonds do several things for your investment portfolio. They provide income, which is helpful if you’re retired or simply prefer to gad about carefree. Bonds can increase in value before they mature, delivering capital gains (of course, they can decrease in value, resulting in losses). Finally, bonds can reduce the risk in your overall portfolio. But to gain these advantages, you have to use bonds correctly and purchase them wisely.

This chapter begins by looking at why you’d want to invest in bonds. Then you’ll learn what bonds are, how they work, and how you can use them to make money. You’ll also find out what’s important in bonds, whether you’re thinking about buying them for income, capital gains, or both. To help you keep your bond investments in the green as much as possible, this chapter also explains the risks you may face when you invest in bonds, and how you can keep those risks at your comfort level.

Why Invest in Bonds?

As you saw above, bonds can play several roles in your investment portfolio. But don’t expect a single bond to do everything all the time. Here’s a quick ...