Looking to diversify your portfolio and lower your risk? Invest in bonds. Specifically Treasure Bonds, bonds issued by the U.S. Government. These are the safest thing out there. I discuss them briefly in investing made simple, so go check that article out as well! I have posted a few articles here on simple and safe ways to invest, but haven’t touched on the topics of bonds at all. Let’s go over what they are and how they work. Treasury Bonds can be an important part of your portfolio.
What are Governments are Bonds and how do they Work?
For those that are unfamiliar with bonds, they are debt investments. Meaning, when you buy a bond, you provide the issuer of the bond with a loan, and they agree to pay you back, with interest.
The way Treasury bonds work is the U.S. issues bonds called Treasures. When you buy US Treasuries, you are lending your money to the federal government for a specified period of time, which can range from days to years.
There are 3 different terms that these bonds have. The shortest term bonds are called Treasury bills, and they mature before one year. Treasury notes last a little longer, generally lasting from two to ten years. Finally, you got Treasury Bonds, they mature between ten and 30 years. Investors look at Government bonds as a safe investment, the interest rates on them are generally lower than other forms of debt investments.
Why Invest in Government Bonds?
When choosing what to invest in, and how to build your portfolio you should always look to have exposure in both debt and equity. That way you are reducing your overall risk.
With a GDP of over $18 Trillion, the US economy is the largest in the world, and the US government’s credit rating is a AAA, the top rating from debt rating agencies Fitch and Moody’s, these are the safest investments around.
When buying bonds from the US Treasury, understand that they are backed by the full faith and credit of the US government. The federal government has very rarely if ever, defaulted on its bonds. So, as you can see there is a very low risk of losing your money when investing in Government Bonds.
What’s the Risk?
You might be thinking, well that’s great and all but what’s the catch? Good question. This one is very simple to explain. Interest rates affect bond prices. The one concern when investing in bonds is that if the Fed chooses to increase interest rates, bonds prices decline, and because of that, your return will take a hit.
A simple rule to remember is as interest rates go up, bond prices typically fall, and when interest rates go down bond prices rise.
How to invest in Government Bonds?
There are a lot of ways you could buy bonds. You can buy them directly, through the Treasury’s direct website which you can find here https://www.treasurydirect.gov/ or you can go the easier route and buy ETFs (Exchange Traded Funds). There are a few ETFs that I can recommend for you, specifically the ones I hold on to. But it would be more beneficially for everyone to take my 2 cents and then do some more added research, as a simple google search, on the different kinds of bond ETFs that are out there. A few ETFs that I have invested in are VGIT(intermediate-term, 3-10 years), VGLT(long-term,10-30 years), and BSV(short-term, 0-5 years). But as I mentioned earlier, I would heavily recommend doing further research and seeing which bonds fit your risk level better.
Though the risks are similar, there is a difference between owning a Bond directly and owning a Bond ETF. While owning a bond directly is the cheapest route to invest in them. You can also own bonds through ETFs! This allows you to have a more diversified set of bonds. Which will also have lower fees!
A few things I would like to leave you, I would highly recommend doing more research on the bond market. It is a complicated market, and there is a lot that goes into it. Having bonds in your portfolio is always good, it helps hedge your risks from the volatility of stocks. There are different types of bonds out there, but Treasury bonds are by far the safest investments you can make.
Hopefully, this was helpful to you all. Any thoughts, comments, or anything I missed, feel free to comment on this article. Let me hear your thoughts!
Update: Here is a great article on whether you should get into treasury bonds now!