Bonds: They’re often known as the “boring” part of a portfolio, but they serve a critical purpose in helping investors manage risk and generate steady returns. With interest rates rising and the economy in flux, you may be wondering if now is a good time to invest in bonds and how to invest in bonds.
In this week’s episode of the HerMoney Podcast, Jean Chatzky sits down with Eric Jacobson, Director of Manager Research at Morningstar, to break down everything you need to know about how to invest in bonds in 2025.
How To Invest In Bonds
Jean Chatzky: I am going to start at the very, very beginning. What’s a bond?
Eric Jacobson: It’s a loan. It’s a way for another party to borrow money from the person buying the bond. And it’s as simple as a U.S. Treasury borrowing money from investors.
Eric Jacobson: The most basic version of a bond we tend to think of as a U.S. treasury bond, in part because it’s the base layer of the entire market. You buy a bond for $1,000, you hold it, ideally, until it matures and it pays you an income stream over the life of that maturity. Whatever the stated interest rate of the bond is what you can expect to get and that’s based on the original $1,000 that you put in. With a treasury bond, we consider that to be the safest available because the treasury always pays its bills.
Jean Chatzky: Why have bonds earned their place in the typical investment portfolio? For as long as I can remember, we have been talking about a portfolio of 60 percent stocks and 40 percent bonds as being kind of the gold standard.
Eric Jacobson: In terms of that 60/40 combination, the general thinking is this if you’re investing for the long term, you probably want to invest in stocks, and depending on how young you are and what your mix of needs are, you’re using those bonds as a ballast. They’re not perfectly inverted, but oftentimes, especially if stocks go down, hopefully, your bonds will smooth that out or even gain in value as a balance so that you don’t feel that pain quite as much.
Bond Funds vs. Individual Bonds: Which Is Better?
Jean Chatzky: Let’s talk bond funds versus bonds. The nice thing about individual bonds is if you do hold it to maturity, you know exactly what you’re going to get. It’s really predictable but for individual investors, it can be hard to build a portfolio of individual bonds. It’s a little labor-intensive. How do bond funds work and who should be in bond funds rather than in bonds?
Eric Jacobson: There are a lot of people who prefer just to buy individual bonds. If you do that, there are strategies in place to try and smooth things out and make it so you’re not taking risks and you’re keeping it cheap. The rest of the bond market often does things differently. A corporate borrower will put a call option into a bond which means that if at some point they want to pay you back early, they can do that because they have this option to do that. And in almost every case, they’re going to do that at the least advantageous time for you and the most advantageous time for them.
Eric Jacobson: These are the cases in which you want to go with plain vanilla treasury bond funds. But if you buy individual bonds from corporations, especially, you want to make sure that you’re getting fair prices. And the easiest way to do that is to buy a mutual fund where you’ve got a professional manager doing that analysis and making sure that they’re getting good pricing.
Is 2025 The Year To Invest In Bonds?
Jean Chatzky: So we are talking in early 2025, the yield on the 10-year Treasury bond recently reached its highest level in 14 months. Is it a good time to invest in bonds? Is there a better time or a worse time when thinking about how to invest in bonds? And how should the individual investors think about this?
Eric Jacobson: In terms of where we are right now, those yields as you mentioned are historically pretty high. That’s good. But if you look at what some of the firms like Vanguard [are saying], they think stocks are overvalued and so they’re recommending that people own more bonds.
Eric Jacobson: If you are just thinking purely in terms of how much risk you can take between now and the next 20, or 30 years, you can rely on the bond portion of your portfolio a little bit better than you could when rates were so much lower because that does give them a cushion. The overall thinking is that the less risk you want to take, the less money you want to have in stocks and the more you want to have in bonds.
MORE ON HERMONEY:
- 13 Women On Where They Keep Their Emergency Funds (And Why They Love HYSAS)
- What Are Certificates Of Deposit? The Top 5 Questions People Are Asking
- HerMoney Podcast Episode 459: How To Retire Early Without Hating Your Life
More money news when you need it! Get the latest and greatest updates on all things investing, budgeting, and making money. Subscribe to the HerMoney newsletter at Hermoney.com/subscribe!
