hey there Tiffany Thomas with wealthy Tiffany dot com and in today's
video what we're gonna be talking about bonds so get really excited it's gonna
be a really fun video okay maybe I'm being a little sarcastic because bonds
aren't that fun but I'm gonna make this as painless as possible and before we
dive in if you are ready for financial freedom right now comment freedom below
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all right let's dive in and talk about bonds I know I've talked a lot about
stocks but I had a request to talk about bonds so I just want to quickly cover
this subject the reason people invest in bonds or the reason they should be
investing in bonds is to mitigate risk they want to reduce that risk so when
they're investing in stocks they are willing to be a little more risky
because they want a higher return and when people are investing in bonds it's
going to be a lower return but usually a lower risk and there's a few things I
want you to keep in mind the first one is when you're investing in bonds
because you are trying to mitigate that risk you want to invest in bonds that
are going to be the least risky you don't want to have risky bonds because
you have stocks which are the risk side of your investment the risk side of your
portfolio or asset allocation if you will so you're investing in stocks to
get a higher return with more risk investing in bonds to reduce that risk
and have a lower return so the way I'd like to look at bonds is if you are
trying to reduce the risk I like to personally go with a bond fund and all
that means is that it's a fund that has a ton of bonds inside of it so a bond in
essence is kind of an IOU note you are giving your money to a government or a
corporation and they are saying okay we're going to pay you back that amount
plus interest on top of that but not all bonds get fulfilled
some of them default so you want to keep that in mind it's not a hundred percent
risk-free investment although less risky than stocks there's still some risk
associated with bonds when you are looking to decide which type of bonds or
bond funds to invest in there are different qualities of bonds different
grades so there are a grade bonds and B grade and C grade a being the highest
and it goes usually with Triple A being the very highest and then it goes to
double-a then single a and then switches over to B and some of them even have a a
B or a BB but you want to stick with the higher quality so you really don't want
to be in the C quality bonds the C grade because those are going to be more risky
and we're trying to mitigate our risk we're trying to reduce that risk so I
would say look at those higher quality higher grade bonds or bond funds and
invest in those and the reason that I like going with a bond fund is because
when going with a bond fund you have all of those different bonds inside of there
and they have different maturity dates when you're investing in a bond you
select a certain time period to invest your money and then you are receiving
that interest back on your money and all of your money back but when you when the
interest rates go up or down over time if you are invested in a bond fund so a
whole bunch of different bonds instead of a single bond you're going to kind of
even out that interest rate because if you're stuck in one bond you're stuck at
that interest rate for the whole length the whole timeframe of that bond and
when you have a bond fund that there's going to be different maturity dates and
so it kind of you know they can start out having maybe like a 2% interest
under those bonds but when those maturity dates hit they need to replace
those with new bonds which if the interest
rate has gone up then it could be a 3% or 4% or 5% whatever I'm just throwing
out different numbers it just varies over time on average of good quality
bonds have returned anywhere from 2% to 4% and the riskier the bond usually the
higher return will be but that's not what we're looking for we're looking for
the least risk possible with our bonds so our return is going to be lower but
they start to replace that with new bonds inside of your bond fund with
better interest rates so you are you know increasing the money that you could
be earning and of course yes it can go the flip side of that they could drop in
time but then you would have those original bonds in there that have
matured so you've made money on those in the beginning with a higher interest
rate so that's just one of the reasons I like to invest in a bond fund because
you know interest rates fluctuate over time and you can kind of just stick with
a bond fund and not really worry about that because of the all of the different
maturity dates that are going to be inside of that bond fund and we're
looking for a bond fund there's going to be an expense ratio associated with that
and so you can see when you're you know looking online at different funds to
invest in there's going to be a column that says expense ratio you want to pay
attention to that because we want to keep that expense ratio as low as
possible because that's a fee you're going to be paying over time so for
example Vanguard has what's called the Vanguard total bond market fund and this
has a number of bonds inside of it and this has I don't know I think it's over
8,000 bonds inside of it so there's a ton of bonds inside of this and it has a
really low expense ratio point zero five or scent and they have an etf version of
this which is 0.03 five percent so even less so you can take a look at that
option and this just gives you a whole number of bonds to invest in by just
investing one funds they have US government bonds
inside of this fund and which are considered to be very low risk along
with Triple A bonds double a single a anything that you might have some be AAA
bonds inside of this fund so you have a little bit of variety in there
but they're all high-grade high-quality bonds which is what we're looking
forward to reduce that risk and there are a number of different bond funds
there's I wanted to I do want to mention one other type which is municipal bonds
and and they have municipal bond funds but with that you're not paying taxes on
the money or earning and usually you're going to earn less money with them units
full bond but you're not paying taxes on that so depending on what state you are
in and if you have your money in a taxable account so you'll be taxed on
that money so it wouldn't be like a retirement account like an IRA or a 401k
but if it is in just a brokerage or a taxable account then if you're in a
state with a high tax rate that could be a good option for you even though it's
kind of lower returns but you won't be paying taxes on that so that is one
thing to consider but this is what I want to point out that studies have been
done over time and the thing is what's most important when you're investing is
your portfolio asset allocation which just means the percentage you have
invested in stocks versus the percentage you have invested in bonds that's your
asset allocation because there's two types of assets bonds and stocks over
time they've compared a person that's investing in the US stock market and
also the foreign market and then they have investments and bonds and let's say
they're investing in municipal bonds or meaningful bond funds and it's a 50
percent in the stocks and 50 percent in the bonds and and then they take a look
at someone else's allocation and maybe they just are investing in the US stock
market and not in the foreign stock and then their bond fund is the total
bond market fund and so a little bit different inside of their investments
but they also had 50% in their stock investment and 50% in their bond
investment and their returns are actually very very similar I don't want
you to get hung up on you know not investing because you're really worried
about which funds to invest in because it really is more about your asset
allocation when you're younger you have a longer time frame that you're keeping
your money invested so you really want to do a high risk investment until you
become closer to when you want to pull out your money then you could switch
some of that over to bonds which is going to be less risky and you know this
varies for individuals because of their certain circumstances and yes their
recommended ideas out there on how much you should have invested in stocks
versus bond bonds because of your age but I feel like we're so many people are
you know retiring early now but that's not really an effective way so you
really have to figure out on your own what it is you would like to be invested
in based on when you would like to retire when you want to start pulling
out that money because if you are okay having a high risk if you have a high
risk tolerance then you could leave 90 percent of your money in stocks and
maybe put 10 percent and bonds even in retirement
it just kind of depends on you and how risky you want to be and how flexible
you are as well because if you you know if you have a lot of your money invested
in stocks and the stock market crashes then you're not going to want to pull
out that money at that time you'll want to wait for a little bit until it starts
to come back up so if you're flexible and you think you know what I can just
get a little high a little side hustle for you know for this year or find
another way to create some extra income and be ok with that
or not take your really expensive vacation one year and take it you know
in a couple years when the stock market market has gone back
if you're willing to be flexible then I'll have to worry so much about having
so much invested in bonds you can still have that high risk and still be getting
those really good returns and have a lower amount in bonds and a bond fund
and because you're willing to be flexible and you know yourself if you
are going to go crazy if you have so much invested in stocks if you have that
90% mustard and socks that you're not gonna be able to sleep at night and
you're gonna be so stressed and worried all the time then don't do that you know
start to put more toward bonds so that you feel comfortable so you can sleep at
night because your health is really important and if you do want to invest
in single bonds make sure you look at that maturity date and the rates that
you're going to be getting that interest rate they call it a coupon rate just as
a side note when you are investing in a bond fund sometimes there are minimas
which could be a $3,000 minimum but if you want to use the or invest in the ETF
a version of that index fund then it's just the price of the ETF which can be
pretty low maybe around you know a hundred bucks or something so keep that
in mind based on how much money you are going to be investing in bonds and just
remember you're trying to mitigate their risk and that's that's the main purpose
for investing in bonds and you know like I said it's not a hundred percent
guarantee that you're going to get all of your money back because sometimes the
bonds do default so that's another reason I like the bond fund you have all
those different maturity dates so the interest rates are changing over time
but if some of them do default then you're not out all of that money because
you have so many bonds inside of that one bond fund that you're invested in so
few of them default not a big deal but if you're only invested in one bond and
that defaults that's a big deal because you want to mitigate your risk you don't
want to lose all of your money or the majority of your money when especially
when investing in bonds another point that I wanted to bring up is that
investing in CDs certificate certificate of deposits
instead of bonds could be a good option and that you may want to take a look at
that and I'm not going to give you all the details on CDs I can do that in
another video if you would like comment below and let me know but you know it
could be another option because sometimes those CDs have some pretty
good rates versus the bonds that you would be investing in and the total
return on that bond fund that I mentioned the etf version for a 10-year
period and it was after taxes it was about 2.3 percent so you know it really
does vary depending on how long you keep your money in there but possibly on
average it could be about two percent sometimes it'll be less than that or
more than that but that's why another option could be looking at CDs because
that is a fixed rate over time and there's different links of CDs that you
can get I mean sometimes it's even like a five month or a year or 18 months but
that could be kind of a nice option and that interest would be paid to you it's
usually monthly and you can take that out if you would like or you can just
continue to reinvest it but it would be at that fixed percent so you know you
can kind of think about that and decide maybe you do want to put some money in
CDs instead of in bonds or a bond fund and just depending on your preference
and if you want to kind of lock in that interest rate instead of doing a single
bond which could default you could do a CD which you're insured EFT against
insured up to $250,000 with most places you want to make sure you know whichever
place you choose that you are insured up to a certain amount and just to keep it
safe because we're mitigating risk rate we're not trying to do something risky
here that's for the stock investing not the bond investing so hopefully this
kind of helps you get an idea on if you want to be investing in bonds or when to
invest in bonds or how much so if you found this video helpful please hit the
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more people and you guys just as a side note since Halloween time I do have
Halloween knows I was a tiger for Halloween so I have Tiger nose alright
you guys that's it for today I hope you enjoyed the bond video and I will see
you in the next video thanks