🏦 Investing in Bonds
Fixed income isn't glamorous — but it's what protects your portfolio when equity markets fall. Here's everything you need to know.
What Is a Bond?
A bond is a loan you make to a government or corporation. In exchange, they promise to pay you interest (the coupon) at regular intervals and return your principal when the bond matures. Bonds are less volatile than stocks but also typically offer lower long-term returns.
Types of Bonds
US Treasury bonds are the safest — backed by the full faith and credit of the US government. Municipal bonds offer tax advantages for high earners. Corporate bonds pay higher interest but carry default risk. I-Bonds and TIPS are inflation-protected and can preserve purchasing power in rising-rate environments.
Interest Rate Risk
Bond prices move inversely to interest rates. When rates rise, existing bond prices fall. This is why 2022 was brutal for bond holders — the fastest rate-hiking cycle in 40 years crushed bond portfolios. Understanding duration (sensitivity to rate changes) is essential for managing bond exposure.
How Bonds Balance Your Portfolio
During equity market crashes, bonds often hold their value or rise as investors flee to safety. A 60/40 portfolio (60% stocks, 40% bonds) has historically smoothed out volatility. Younger investors may need less bond exposure; retirees typically need more. Your allocation should reflect your timeline and income needs.