What Are Bonds?
A bond is essentially a loan you make to a government or corporation. They borrow your money, pay you interest (called the coupon) on a regular schedule, and return your principal at maturity. Bonds are less volatile than stocks and provide steady income, making them essential for portfolio balance — especially as you approach retirement.
Types of Bonds
- US Treasury bonds — Safest investment in the world. Backed by the US government. Interest is exempt from state and local taxes. Types: T-bills (under 1 year), T-notes (2-10 years), T-bonds (20-30 years), TIPS (inflation-protected), I-bonds (inflation-adjusted savings bonds)
- Municipal bonds — Issued by state and local governments. Interest is often exempt from federal (and sometimes state) income tax. Best for high-tax-bracket investors in taxable accounts
- Corporate bonds — Issued by companies. Higher yields than Treasuries but higher risk. Investment-grade (safer) vs high-yield/junk bonds (riskier but higher income)
- Bond funds/ETFs — Easiest way to own bonds. BND (total bond market), AGG (aggregate bond), or TLT (long-term Treasury). Instant diversification across thousands of bonds
How Much in Bonds?
- Age 20-35 — 10-20% in bonds. You have decades for stock volatility to smooth out
- Age 35-50 — 20-30% in bonds. Beginning to protect accumulated gains
- Age 50-65 — 30-50% in bonds. Capital preservation becomes more important
- Retired — 40-60% in bonds. Income and stability are priorities, but keep some stocks for inflation protection
- Simple rule — Your age in bonds (30 years old = 30% bonds). Or be more aggressive: your age minus 20 in bonds (30 years old = 10% bonds). Either approach is reasonable