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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

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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.

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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.

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Stocks Mentioned

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

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

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