Investing in Bonds For Dummies. Russell Wild

ssell Wild

      Investing in Bonds For Dummies

      Investing in Bonds For Dummies®

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      John Wiley & Sons, Inc.,

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      Published simultaneously in Canada

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      Library of Congress Control Number: 2015950105

      ISBN 978-1-119-12183-1 (pbk); ISBN 978-1-119-12184-8 (ePub); ISBN 978-1-119-12185-5 (ePDF)

      Introduction

      Welcome to Investing in Bonds For Dummies! Perhaps you bought this book online, either in text or digital format. But if you are still the kind of reader who prefers to browse through aisles and handle books before you buy them, you may be standing in the Personal Finance section of your favorite bookstore right now. If so, take a look to your left. Do you see that pudgy, balding guy in the baggy jeans perusing the book on getting rich by day-trading stock options? Now look to your right. Do you see that trendy young woman with the purple lipstick and hoop earrings thumbing through that paperback on how to make millions in foreclosed property deals? I want you to walk over to them. Good. I want you to take this book firmly in your hand. Excellent. Now smack each of them over the head with it. Nice job!

      Wiley (the publisher of this book) has lawyers who will want me to assure you that I’m only kidding about smacking anyone. So in deference to the attorneys, and because I want to get my royalty checks … I’m kidding! I’m only kidding! Don’t hit anyone!

      But the fact is that someone should knock some sense into these people. If not, they may wind up – as do most people who try to get rich quick – with big holes in their pockets.

      Those who make the most money in the world of investments possess an extremely rare commodity in today’s world – something called patience. At the same time that they’re looking for handsome returns, they are also looking to protect what they have. Why? Because a loss of 75 percent in an investment (think tech stocks 2000–2002) requires you to earn 400 percent to get back to where you started. Good luck getting there!

      In fact, garnering handsome returns and protecting against loss go hand in hand, as any financial professional should tell you. But only the first half of the equation – the handsome returns part – gets the lion’s share of the ink. Heck, there must be 1,255 books on getting rich quick for every one book on limiting risk and growing wealth slowly but surely.

      Welcome to that one book: Investing in Bonds For Dummies.

      So just what are bonds? A bond is basically an IOU. You lend your money to Uncle Sam, to General Electric, to Procter & Gamble, to the city in which you live – to whatever entity issues the bonds – and that entity promises to pay you a certain rate of interest in exchange for borrowing your money.

      This is very different from stock investing, where you purchase shares in a company, become an alleged partial owner of that company, and then start to pray that the company turns a profit and the CEO doesn’t pocket it all.

      Stocks (which really aren’t as bad as I just made them sound) and bonds complement each other like peanut butter and jelly. Bonds are the peanut butter that can keep your jelly from dripping to the floor. They are the life rafts that can keep your portfolio afloat when the investment seas get choppy. Yes, bonds are also very handy as a source of steady income, but, contrary to popular myth, that should not be their major role in most portfolios.

      Bonds are the sweethearts that may have saved your grandparents from selling apples on the street during the hungry 1930s. (Note that I’m not talking about high-yield “junk” bonds here.) They are the babies that may have saved your 401(k) from devastation during the three growly bear-market years on Wall Street that started this century. In 2008, high-quality bonds were just about the only investment you could have made that wound up in the black at a time when world markets frighteningly resembled the Red Sea. And in 2011, when stocks went just about nowhere during the course of the year, bondholders of nearly all kinds were richly rewarded.

      Bonds belong in nearly every portfolio. Whether or not they belong in your portfolio is a question that this book will help you to answer.

      About This Book

      Allow the next 270 or so pages to serve as your guide to understanding bonds, choosing the right bonds or bond funds, getting the best bargains on your purchases, and achieving the best prices when you sell. You’ll also find out how to work bonds into a powerful, well-diversified portfolio that serves your financial goals much better (I promise) than day-trading stock options or attempting to make a profit flipping real estate in your spare time.

      I present to you, in easy-to-understand English (unless you happen to be reading the Ukrainian or Korean translation), the sometimes complex, even mystical and magical world of bonds. I explain such concepts as bond maturity, duration, coupon rate, callability (yikes), and yield; and I show you the differences among the many kinds of bonds, such as Treasuries, agency bonds, corporates, munis, zeroes, convertibles, strips, and TIPS.

      Since I wrote the first edition of this book, the number and types of bond funds in which investors can now sink their money has virtually exploded … for better or worse. Many of these new funds (mostly exchange-traded funds) are offering investors slices of the bond market, often packaged in a way that makes bond investing trickier than ever.

      And perhaps the biggest change since the first edition of this book was published is this: Interest payments – the main reason that bonds exist –