Please ensure Javascript is enabled for purposes of website accessibility

Ask a Fool: What Exactly Is a Bond, and How Do I Invest in Them?

By Matthew Frankel, CFP® - Updated Apr 17, 2019 at 11:55AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you don't understand bond investing, you're not alone.

Q: I read that based on my age, I should have about 70% of my portfolio in stocks and 30% in bonds. The only problem is that I know absolutely nothing about bond investing. How should I go about doing it?

A bond is a debt instrument issued by a government, corporation, or other entity. For example, when the U.S. government needs to borrow money, it issues Treasury bonds. When companies need to borrow money, they often do so by issuing corporate bonds.

A bond has a face value -- typically $1,000 -- and pays a set interest rate, known as the coupon rate, based on that value for a specified amount of time. For example, a 10-year corporate bond with a 6% coupon rate would pay the bondholder $60 per year for the next 10 years. At the end of the 10-year period, the issuing company would repay the original $1,000 and the bond would no longer exist.

Check out the latest earnings call transcripts for the companies we cover.

Of course, there's a lot more to bond investing than I can explain in a couple paragraphs, but that's the main idea.

The world of bond investing can be rather confusing and difficult to navigate, especially if you're only used to buying stocks. Fortunately, most investors don't need to worry about buying individual bonds -- a bond mutual fund or ETF (or a few) should do just fine.

For example, the Vanguard Total Bond Market Index Fund ETF (BND 0.40%) allows you to invest in a wide assortment of government, corporate, and municipal bonds, and at a bare minimum of expense. If you want some inflation protection in your portfolio, you could allocate some of your bond dollars to an ETF that specializes in inflation-protected bonds, like the Schwab U.S. TIPS ETF (SCHP 0.12%). There are many other fund options, but the point is that unless you have the time and desire to thoroughly learn about bond investing, you don't need to worry about buying individual bonds.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Vanguard Bond Index Funds - Vanguard Total Bond Market ETF Stock Quote
Vanguard Bond Index Funds - Vanguard Total Bond Market ETF
BND
$76.98 (0.40%) $0.31
Schwab Strategic Trust - Schwab U.S. TIPS ETF Stock Quote
Schwab Strategic Trust - Schwab U.S. TIPS ETF
SCHP
$58.20 (0.12%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
322%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.