Money Rehab with Nicole Lapin - Bonds 101: How to Add Stability (and Income!) to Your Portfolio

Episode Date: March 20, 2025

 Stocks get all the attention, but bonds? They deserve some love too. If the latest market swings have you feeling a little queasy, bonds can help balance your portfolio and create a steady stream of passive income. In today’s episode, Nicole sits down with a Money Rehabber who wants to start investing in bonds but isn’t sure where to begin. Nicole breaks down bond basics, key terms, and how to build a bond strategy that works for you.  To start investing in bonds today, go to public.com/moneyrehab All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Open to the Public Investing, member FINRA & SIPC. Treasury accounts offering 6 months T-Bills are offered by Jiko Securities, Inc.,member FINRA & SIPC. Securities in your account are protected up to $500,000. For details: www.sipc.org. Banking services and the Bank Accounts are provided by Jiko Bank, a division of Mid- Central National Bank. For U.S. Investments in T-bills: Not FDIC Insured; No Bank Guarantee; May Lose Value. Treasuries risk disclosures, see https://jiko.io/docs/treasuries_risk_disclosure.pdf. See public.com/#disclosures-main  Advisory services for Treasury Accounts are provided by Public Advisors, an SEC-registered investment adviser. Public Advisors and Public Investing are affiliates and both charge a fee for their respective services. For more details, see Public Advisors’ Form CRS, Form ADV Part 2A, Fee Schedule, and Treasury Account page. A Bond Account is a self-directed brokerage account with Public Investing, member FINRA/SIPC. Deposits into this account are used to purchase 10 investment-grade and high-yield bonds. The 6.6% yield is the average, annualized yield to worst (YTW) across all ten bonds in the Bond Account, before fees, as of 3/12/2025. A bond’s yield is a function of its market price, which can fluctuate; therefore, a bond’s YTW is not “locked in” until the bond is purchased, and your yield at time of purchase may be different from the yield shown here. The “locked in” YTW is not guaranteed; you may receive less than the YTW of the bonds in the Bond Account if you sell any of the bonds before maturity or if the issuer defaults on the bond. Public Investing charges a markup on each bond trade. See our Fee Schedule.    Bond Accounts are not recommendations of individual bonds or default allocations. The bonds in the Bond Account have not been selected based on your needs or risk profile. See Bond Account Disclosures to learn more. *Terms and Conditions apply. 

I'm Nicole Lapin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. When it comes to investing, a lot of people think about stocks first. And hey, I totally get it. Stocks are very exciting. But bonds do deserve a little bit more love. If you're looking for a way to earn passive income with lower risk than stocks, bonds might be your new best friend. Today I'm talking to a money rehabber who wants to start investing in

bonds but isn't sure where to start. We'll go over the basics, break down key terms, and figure out how bonds can fit into her financial goals. So let's get into it. into her financial goals. So let's get into it. Sierra, welcome to Money Rehab. So what's your question? I've been investing for a couple of years now and I'm starting to see steady growth in my portfolio. That's awesome. Yeah, but that really bad day in the market the other day made my portfolio drop and that really freaked me out. I've heard you say on the show before that it's important to

diversify but I'm only invested in stocks right now. So everything that happened with that market dip is making me feel like I should really probably consider bonds more seriously and actually start diversifying. Oh, great. Okay. So there's a lot to talk about here. I love that you're thinking about diversification. So you're not invested in bonds, but you're invested in stocks. Have you been picking individual stocks or investing in equity funds? A little bit of both, but mostly funds. Awesome. How much do you have invested? I have about $75,000 in my portfolio.

And you have no bonds? Girl! I know. It's totally okay. We can fix this. How old are you, by the way? I'm 27. Okay, well good for you for starting so early. I love to hear that. And it is common for younger investors to focus on equities or stocks because equities have a reputation for delivering higher rewards than bonds.

But they are higher risk, higher reward, which is why you see some people phase those out and opt into more bonds as they get older because they're more steady. So let's talk about financial goals. Are you invested for retirement, passive income, something else? I guess just overall financial wellbeing.

I don't have a particular goal in mind. I'm renting right now. I'm gonna probably wanna buy a house at some point, but that still feels kind of far off. So I just wanna grow my net worth. Love it. Okay, so let's talk about diversification. If anyone listening doesn't know,

diversification is the investing version of don't put all of your eggs in one basket. So have you started thinking about how bonds might fit into your portfolio? Not really. I'm open to just generally learning more. Cool. So essentially, a bond is an IOU.

Most people know that the US government issues bonds, but so do other governments, municipalities, and companies. We have to talk about U.S. bonds or treasuries because they're a really solid investment, but I also want to talk about corporate bonds because not enough people know about them. Sound good? Yeah, love it. Great.

So, treasuries are bonds issued by the U.S. government, which makes them one of the safest investments out there because if the U.S. government goes down, we have more to be concerned about than our bond investments. It's zombie apocalypse stuff. So they come in a few flavors, Treasury bills or T-bills, and those are short-term bonds that mature in a year or less. Then there are T-notes, Treasury notes, they mature between two and 10 years. And then for the long haul, there are T bonds and they mature in 20 or 30 years. Any questions about that?

I guess my question would be, how do you choose which one? Well, that's gonna be very personal based on your goals, but I can tell you what I do. I typically look at the yield, which is how you can determine how much you'll earn an interest from the bond investment if you keep invested until the bond fully matures. Typically, I just wanna earn as much money as I possibly can.

But there are also other personal factors like when you need the money back. If you wanted to buy a house in the next two years, for example, I wouldn't put my entire savings into a 30-year bond because I would need it in two years. You know what I mean? Yeah, that makes sense. So the yield on Treasuries is subject to change, obviously, but right now I'm seeing the range between 3.85 and 4.27%. I'll tell you where to find those in just a sec.

But again, the big advantage to bonds is that you still are earning interest. It's just way lower risk. And you can set it and forget it. I mean, some people level up on this strategy through treasury ladders. Have you heard of that term before? I don't think so. A treasury ladder is when you buy treasuries with different maturities,

so you always have bonds maturing and paying you out. For example, you buy a one-year, three-year, and five-year treasury bond today. When the one-year bond matures, you roll the money into a new five-year bond. The next year, the three-year bond matures, you do the very same thing. That way, you're always keeping a steady

stream of income coming in while you're also reinvesting. Okay, cool. How do I do that? Let's put a bit in that one for a sec too because I'll tell you how to do all of this once we go through your options. But next I want to talk about corporate bonds. Corporate bonds work the same way as treasuries do, except you're lending money to a company instead of the government. There are literally thousands of companies that do this. Big companies that you see in the headlines, Apple, Microsoft, Alphabet, the parent company of Google, Nvidia, Amazon, even private companies that you can't buy on public markets. I didn't know you could do that.

Yeah, so if you invest in funds, you're probably already invested in some of these companies anyway. But bonds are another way to do it. Corporate bonds tend to pay higher yields than treasuries. Not always, but that's the general trend. But that's because corporate bonds come with more risk. If a company struggles, they might not be able to pay you back. But you can assess the company's credit worthiness through credit ratings.

It's like their credit score. Agencies like Moody's rate corporate bonds based on how risky they are. Sort of like our credit scores as individuals, but for companies. So what's a good rating? Great question. AAA is the safest, while lower rated bonds,

double B and below are riskier, but they might offer higher returns. Remember, lower risk, lower returns, higher risk, higher returns. So credit rating is definitely something to check out when you're choosing a corporate bond. And while you're doing your research, I'd also look at the bond's liquidity score

and whether it's callable. The liquidity score tells you how easy it is to buy or sell the bond. Some corporate bonds are heavily traded while others might be harder to sell. So if something has a low liquidity score, you might not be able to melt that bond into cash, so to speak, when you need it.

Low liquidity means it's harder to turn into cash. Essentially, yes. And then some corporate bonds are callable, meaning that a company can pay them off early. This can be a downside for investors if interest rates drop, because the company might decide to call a bond and reissue new bonds at lower rates, leaving you without those interest payments.

Okay. So let's circle back to you. Now that we've got the basics covered, how are you feeling? I'm feeling good. I feel like I have all the information I need about my options, but I'm not sure exactly how much to buy. That is really personal based on your goals. One common way investors start allocating their portfolios is just by taking their age and making that percentage of their portfolio invested in bonds. So for you, that would be 27% in bonds and 73% in equities or stocks.

But again, you'll want to think about your specific goals and how bonds should play a role in helping you achieve those goals. Okay,, you'll wanna think about your specific goals and how bonds should play a role in helping you achieve those goals. Okay, so you mentioned you'd tell me where I should go to look at treasury yields and also how to set up a treasury ladder. Yes, so the place I do this is public. Public makes bond investing super, super accessible.

You can invest in both corporate bonds and treasuries on public. So when we were talking, I went on my public account to look at treasury yields. That's where I go to check to see what yields are available to me because public is the only place that I personally buy bonds. True story, legit.

On public, you can buy corporate bonds, you can set up a treasury ladder, and there's also a bond fund right now that combines 10 investment grade and high yield corporate bonds. I have personally invested in that and right now the bond fund is earning 6.6% annual yield. And when you invest, you lock that rate in even if the Fed lowers rates. You can sign

up for an account if you want at public.com slash money rehab. I actually already have a public account. I just haven't looked at the bond stuff. So I'll check that out. Oh, amazing. Well, yes, do that. Let me know how it goes. Thank you. Of course.

For today's tip, you can take straight to the bank. If you're ready to start investing in bonds, public.com is my go-to spot. Plus, if you roll over a 401k or transfer an IRA to public, you can earn a bonus of up to $10,000. Open your account today at public.com slash money rehab. This is a paid endorsement for public investing. Full disclosure and conditions can be found

in the podcast description. Money Rehab is a production of Money News Network. I'm your host, Nicole Lapin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at Money News and

TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.