Money Rehab with Nicole Lapin - “How Do I Invest in Bonds? Help!” (Listener Intervention)

Episode Date: August 9, 2024

Today Nicole talks to a Money Rehabber who has never invested in bonds… and isn’t sure if she should. Nicole explains how bonds work, what they offer, why bonds are at stellar rates right now— and even takes the listener through the steps of buying a bond. If you want to follow along at home and explore bond offerings on Nicole's favorite platform, 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 Public Investing, Inc., member FINRA & SIPC. Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. Brokerage services for alternative assets are offered by Dalmore Group, LLC, member FINRA & SIPC. Cryptocurrency trading services are offered by Bakkt Crypto Solutions, LLC (NMLS ID 1828849), which is licensed to engage in virtual currency business activity by the NYSDFS. Cryptocurrency is highly speculative, involves a high degree of risk, and has the potential for loss of the entire amount of an investment. Cryptocurrency holdings are not protected by the FDIC or SIPC. Brokerage services for treasury accounts offering 6-month T-Bills are offered by Jiko Securities, Inc., member FINRA & SIPC. Banking services are offered by Jiko Bank, a division of Mid-Central National Bank.  Fractional Bonds are offered by Public Investing. They are exposed to various risks typical of bond investments, including liquidity risk, interest rate risk, credit risk, inflation risk, and potential tax liabilities. Fractional Bonds also carry additional risks including that they are only available on Public and cannot be transferred to other brokerages. The value of these investments may be less than the original cost at the time of redemption. Typically, bonds with higher risk yields carry greater risk of default. Fractional Bonds are only bought and sold by a single market participant, Moment Markets. Bonds may be available from different brokers or dealers at prices different than those displayed. All prices are subject to change without prior notice. Public Investing earns a fee on every fractional bond trade. Trading 6 Month Treasury Bills through Fractional Bond investing offered by Public Investing is separate from the Public Treasury Account offered in partnership with Jiko. See risks: https://public.com/disclosures/apex-fractional-bond-disclosure  Securities investments: Not FDIC Insured; No Bank Guarantee; May Lose Value. See public.com/#disclosures-main for more information. *APY as of 6/20/24, subject to change.

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To get started, visit bofa.com slash newprosmedia. That's B-O-F-A dot com slash N-E-W pros, P-R-O-S, media. Bofa.com slash newprosmedia. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Well, every investing portfolio is different. At the most zoomed out view, most portfolios are just a mix of stocks and bonds. But what that mix should be depends on your financial picture and your financial goals. Today, I'm talking to a very, very special guest, Morgan, our producer. Morgan has never invested in bonds and isn't sure if she actually should, even though she's been listening to many, many episodes about them. I give her the framework to allocate her portfolio that you can use too.

Plus, we also go through steps of buying a bond together. So if you're a bond newbie as well, or if you just want to learn my favorite way to buy bonds, you can follow along. So let's get into it. Morgan, very excited to say welcome to Money Rehab. Thank you so much. Happy to be here. Long time listener. Second time caller? I don't know. Third time caller? I was going to say I think more than that. Are you ready to talk about bonds? I think so. Yeah, bond girl. All right. Before we dive in, I actually want to test a theory that I have. What do you think when you think about bonds? So I have heard you talk about bonds,

but I just think that they're so boring. When I picture a bond, I picture the treasury bonds, I think, or I bonds or gift bonds, I don't know, bonds that my grandfather gave me when I was born that haven't even matured yet. And they're worth maybe like $50. And I just remember learning that I had gotten them because I was really, I was a baby, a small wee baby when I got them from him. But then learning that I had these, I was like, okay, wish it was like a bike or an ice cream cone, but okay. Just boring. It's a long time, Morgan. You are 12 years old, so give it a few more years. But yes,

you are totally proving my theory here. Bonds have gotten the worst rap in recent years, my theory here. Bonds have gotten the worst rap in recent years, but truly it is my mission to bring some sexy back to bonds because every expert will tell you that bonds are a critical part of any investor's portfolio. So have you invested in any kinds of bonds before? It sounds like grandpa has, but you haven't. I haven't purchased them myself. I've invested in some stocks, so I have invested before, but I haven't purchased them myself. I've invested in some stocks. So I have invested before, but I haven't bought any bonds. Okay. Not only have you invested in stocks, but somebody has a six-figure portfolio. Good memory. I do. I do. Thanks to Money Rehab. Can we have like insert sound effects, please? Totally. I can do that. I can do that in post.

please. Totally. I can do that. I can do that in post. Excellent. So how would you generally rate your appetite for risk? Being the aforementioned 12 years old that you are, you have a lot of time. So are you like a risk it for the biscuit investor or is like how you were brought up something that makes you more of a slow and steady investor? I would say I'm probably somewhere in the middle. The first time I ever invested, it was when I was at the company and I had a 401k. And so they tell you there's like a sliding scale where you can rate your risk appetite. And I put it like three quarters of the way to risky because I, the idea of like all or nothing definitely makes me nervous, but I feel like, you know,

I've been listening to money rehab. I had a long time horizon. I'm not planning on touching this money for a while. And so if it goes down a little bit in the meantime, that's okay. That's sort of how I feel about it, but I just don't want it to go to zero. Nobody does. You and me both. So you know this by hearing way too much of my voice. I do not wish that on anybody else. But for any listener who needs a little refresher on bonds, bonds are basically like an IOU.

But instead of you owing someone something, you're the one who is lending that money out and you will be then repaid for that money plus interest. A big draw for investors when it comes to bond investing is that you have a pretty good sense of how much you're going to get at the end, which is your yield, depending on what kind of bond you're actually investing in. This is a big perk compared to something like the stock market, for example, where you might invest in a cool tech company and that tech company might quadruple in value or the tech company might go bankrupt and you lose everything. There's more ambiguity around what you'll gain or lose with stocks. But with bonds, there is typically a set interest rate. So you can easily figure out how much money you're going to make by the time the bond fully matures. Does that make sense? Yeah, that makes sense. That makes sense. And I do like the idea of having a better sense of what I'm actually going to get from the investment. So that makes sense in that. I like that. I like the sound of that. We like certainty around here. Certainly. Yeah, there she is.

There are many types of bonds. You rattled off a few. I'm going to stick to federal government bonds for this episode, also known as U.S. Treasuries, because they're a big part of the bond ecosystem. Investment advisors typically talk about bonds being super safe and U.S. treasuries, one of the safest bonds out there because those treasuries are backed by the U.S. government. I invest in both stocks and bonds because I like to diversify and have different levels of risk in my portfolio. So what's your risk profile then, would you say? Oh, Your risk profile then, would you say? Oh, as a fellow 12-year-old.

Well, I am 13, so I don't have as much time as you do. But I do like to keep probably 75% in equities or stocks and maybe about 25%. That would make sense. Or maybe a little bit less in bonds. But bonds are killing it right now. Interest rates are up. So when interest rates go up, bond yields go up too. And I like yield. That means money. We like money. Great. We like my fat. Sign me up. I'm trying. How do you think about your investing strategy right now? Like, are you doing some dollar cost averaging vibes? Are you?

No, I'm not. Like, you find a dollar on the floor, you invest it. Maybe. Yeah, I would say it is a little haphazard. I do have some money going from my paycheck to, and thanks for that. Thanks for that paycheck, by the way. I do automatically invest a certain amount of my paycheck every month and I just have it go into S&P 500 index funds. And then sometimes I'll get like a wave of inspiration and be like, I'm going to do something a little bit different and like read a little bit more about other

things to invest in, or I'll do the opposite and I'll have some money just sitting in my brokerage account, but not invested. So I would say it is just a little hazard all around. Okay. So you are not 12 years old. I know this is breaking news, but you are wearing a Forbes 30 under 30. Yay. Sweatshirt. So you are under 30. I am. I'm 28. 28 to be exact. So as a starting point, you'll get the advice to invest your age in bonds. So what does that mean? That would be your age in a percentage. More accurately, it would be 28% of your overall portfolio in bonds and then the rest. So 72% in stocks. What I would tell any money rehabber to do, though, is to not take one size fits all advice. You should put your financial strategy together based on you, your specific goals. So let's do a little exercise.

What's a financial goal that you want to accomplish a year from now? I would say around that time, I think is when my fiance Jack and I want to have our wedding. I think is when my fiance Jack and I want to have our wedding. And so I would like to have some money available to me to pay for that. Am I invited? Of course you're invited. Duh. Yay. Okay. It will be the most glorious wedding. Um, what about five years from now? What about five years from now? Five years from now, I don't really know if it'll make financial sense for me to buy a house because I know that that's, from listening to you, it's not the best move for everybody. There are benefits to renting too. But maybe five years from now, I'd like to be in a position where I could consider buying a house because right now, like I couldn't even do that. Like that, that conversation would not go very far. Um, but five years from now,

I'd like to be able to look at Zillow, a real estate website and see a house option that doesn't make me cry like to see one and be like I could maybe swing that okay to be clear you do live in New York City you do make like a good amount of money so no it's true you could buy a house to clarify in a lot of places you could buy a house in New York probably not a house that you would want I don't't know. Houses are so expensive in New York, but, but, but in Maine, you could for sure buy all the houses. In Maine, I could buy a house. Yes. Yes. Okay. 20 years from now. Well, Jack wants to have three kids and my God. Yeah. And I don't, I don't know about that, but one, to start sounds good. So in 20 years, whatever family we have, and if we have kids, I'd like us to be comfortable. I'd like to be able to go on vacations together.

And if they want to go to college, I'd like them to be able to have like a what like them. I'm saying that he's totally incepting me into having three kids. They won one kid maybe or whatever. You're the boss of that. I'm the boss. You know, for a lot of people in my family, if they looked at college, how much financial aid they would get was a really big consideration in terms of which college they would end up at. I'd like that to be less of a

factor for my kids. That would be a goal in 20 years, I'd say. I love that goal. Thanks. And I try to keep my goals in mind too, as I'm investing, it just keeps me more motivated because then you have a why behind what you're doing. Otherwise, it just feels like a big kid version of the bike or the ice cream or a thing that you wanted instead of having a dumb, boring bond. So keeping those goals in mind, I think, is really, really important to keep you going. Yeah, that makes a lot of sense. And I, I never really thought about this very much. Haven't talked about it with my partner either. So that would probably be a good next step. Wait, which part did you not talk to Jack about? Goals for money in five years, 20 years. He knows that we're getting married.

I hope so. He wants three kids. He's the luckiest man ever. Of course he does. Okay. So, but you haven't talked about like, what does freedom or, you know, independence look like for us financially? And it's really good that you have a specific anecdote about college and not factoring in financial aid. Like that was a factor for you and your circle of friends when you were in high school. I think those specific things really help keep you motivated. Yeah. Yeah, definitely. And I'd say we've talked in more broad terms about just how important financial responsibility is to both of us. And, you know, there was a moment where he was thinking about going to grad school and then he wouldn't have an income. And what would that look like?

And so we've, we've talked about financial responsibility and us both having a responsibility to ourselves and each other to be financially responsible, but we haven't talked specifically about like, okay, Jack, you want to have three kids. That's a lot of money. That's going to be really expensive. Like, should we start saving for that? Do you want to buy a house in five years? What's that timeline for you? Those kind of more specific timelines and goals and price tags we haven't talked about. Okay. Well, something I think about too, in addition to my goals is also risk tolerance. And that's something that only you can answer for yourself. My risk tolerance is not going to be your risk tolerance and your risk tolerance might not be Jack's risk tolerance.

And that's something that you might want to figure out. And they don't have to be the same. They just have to be compatible. But for short-term goals, my risk tolerance, and I think most people's risk tolerance should be super low because if you need money, you don't want to lose it. All investing involves some risk, and I want to choose investments with lower risk if I'm going to need that money ASAP. That makes sense. But for my longer-term goals, I personally am open to more risk because I have a longer time horizon to weather out the volatility and the ups and downs of the stock market. So thinking about what investment strategy you want to build around your goals, you said it. It is a wise phrase. Goals have price

tags. So when you figure out what that price tag is, you're going to want to take a hard look and figure out what your risk tolerance is going to be to get you to those goals. That makes a lot of sense. Well, let's buy some bonds, shall we? Cool. So I, as you know, because I've talked about it a lot on the show and off the show, I only buy bonds on public. If you want to download the app, you can follow along. You can pull it up at public.com slash money rehab if you don't already have it already. I already have it. You made me download it a long time ago. It is a prerequisite of employment around here. So I know you haven't bought a bond before, like of any kind. So I'm assuming no U.S. Treasury. You haven't gone to treasurydirect.gov, right?

No. Let me just save you some time. It is a terrible, terrible interface. It looks like it was made during the dot-com bubble, and it should have just been left to burst in 2000. And it's so confusing. I feel like finance is confusing enough without the interface also being problematic. I feel like finance is confusing enough without the interface also being problematic. Yeah, that's totally fair. Cold. That's cold to treasurydirect.gov. But yes, I'm with you. But public makes it really, really easy. So that's why I use public. On public, you can go to the trade button and then you'll see where you can pick bonds. And there you can see where you can buy treasuries or corporate bonds. Once you go to treasuries, you'll be able to compare different rates on different

treasuries and then just pick the one you want. Something that I like about public is that you can see how much you can expect to earn from the treasury you pick. This is really helpful because some treasuries are expressed in an annualized return. So if you invest in a six-month treasury, they're in weeks, by the way, so that's 26 weeks, for example, you'll see the return for that treasury that was invested for 52 weeks or a year. Some very quick week math. I've been to this treasury rodeo before, Morgan. Because a 26-week treasury or six-month treasury matures in half the time of a yearly treasury or a 52-week treasury, you're going to get half of the annualized rate if you get one that's half the time. Does that make sense?

Yeah, that does make sense. I wouldn't have assumed that that's the way that it works, but you know, well, yes, I, sometimes I see people who get a 26 week T-bill and then they think they're going to get five, whatever percent, and then it matures in, you know, six months and the five, whatever percent would have been if it matured in one year, you can roll it over and get that, if it matured in one year. You can roll it over and get that, but you don't get that after a shorter amount of time. That would be a super hack, but if only. If only. So rather than getting your calculator out every single time you buy a bond, public's going to tell you how much you'll get if you keep the bond until maturity. So once you pick a bond, then you decide how much you want to invest. The cool thing about investing on public is that you can do fractional bond investing. So on treasury.gov, for many types of treasuries, you can only invest in $100 multiples. So if you

had a random amount of money, I don't know, $133, and you wanted to invest in bonds, you would be only able to invest $100 because that's the increment. But on public, you could buy in increments of $100 whatever dollars. So that $133 investment would be possible. All right. That's helpful. That's good to know because I think one of my action items after this is to be a little bit less haphazard with what I invest. And so I can figure out exactly what number I should be putting into bonds and knowing

that I'll be able to take whatever that number is and actually invest that number is cool. The coolest. How are you feeling right now? Are you ready? Confident? I feel pretty good about it. I think it helps that I've been invested in stocks before. My very first

investment ever was a little bit scary because I was like, what if all of this money goes away? But as you have said before on the show, if the US government defaults on a treasury bond, we have bigger problems than my $133 treasury. So I don't feel like nervous as I did the first time I invested in stocks. And I feel good. It always feels good to feel like I'm doing something that is good for my future. All right. So let's recap. You're going to think through your short-term and your long-term financial goals.

You're going to maybe talk to Jack if he's lucky about that. You're going to decide what investments will help you meet those goals. You're going to maybe talk to Jack if he's lucky about that. You're going to decide what investments will help you meet those goals. So reverse engineer from the goals and the time horizon and what feels comfortable with your risk tolerance. And then you're going to decide what you want to contribute toward those bonds and then buy them on public. Obviously, we talk every five minutes. So you will definitely tell me how this goes. Yeah. And if I don't, you will definitely ask me because you talk about public so much. So annoying. Well, for today's tip, we'll take straight to the bank. If you want to invest in bonds,

please don't make it hard on yourself. It is not that serious. Use public, which like I said, is truly the only place I personally go to buy bonds. And when you're on public, you also see that you can invest in more than just bonds. Public has stocks, options, ETFs, even a high yield cash account where you can earn 5.1% annual percentage yield on your cash currently. It is all of your investing needs in one place. Get started today. Public.com slash money rehab. This is a paid endorsement for public investing. Full disclosures and conditions can be found in the podcast description. Money Rehab is a production of Money News Network.

I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Levoy. 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 moneynews and TikTok at moneynewsnetwork 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.