Introduction

Perhaps you bought this book online, either in text or digital format. But if you’re still the kind of reader who prefers to browse through aisles and handle books before you buy them, you may be standing in the Personal Finance section of your favorite bookstore right now. If so, take a look to your left. Do you see that schmo in the baggy jeans perusing the book on day-trading stock options? Now look to your right. Do you see the ninny in the blue hoodie thumbing through that paperback on how to make millions overnight in foreclosed property deals? I want you to walk over to them. Good. Now I want you to take this book firmly in your hand. Excellent. Finally, I want you to smack each of them over the head with it.

There. Didn’t that feel good?

Wiley, the publisher of this book, has lawyers who will want me to assure you that I’m only kidding about smacking someone with this book. So in deference to the attorneys, and because I want to get my royalty checks, I’m kidding. Really and truly, don’t hit anyone.

But the fact is that someone should knock some sense into these people. If not, they may wind up — as do most people who try to get rich quick — with nothing but big holes in their pockets.

Those who make the most money in the world of investments possess an extremely rare commodity in today’s world. It’s called patience. At the same time that they’re looking for handsome returns, they’re also looking to protect what they have. Why? Because a loss of 75 percent in an investment (think tech stocks 2000–2002) requires you to earn 400 percent to get back to where you started. Good luck getting there.

In fact, garnering handsome returns and protecting against loss go hand in hand, as any financial professional should tell you. But only the first half of the equation — the handsome returns part — gets the lion’s share of the ink. Heck, there must be 1,255 books on getting rich quick for every one book on limiting risk and growing wealth slowly but surely.

Welcome to that one book: Bond Investing For Dummies, 3rd Edition.

YES, I know, I know. This book is being published in what may turn out to be possibly the worst year in bond history. What lousy timing. Well, no, not really… . In fact, to make this year (2022) the worst year in history, bonds would have to lose more than the aggregate US bond market lost in 1969 — a tad more than 5 percent. Heck, the stock market can easily lose double that in a day. As I’m writing these words, the US stock market is down more than double that over the past month.

So just what is this investment that even in the worst of times loses little value, this investment that is both the past and present’s best complement to stocks?

A bond is basically an IOU. You lend your money to Uncle Sam, to General Electric, to Microsoft, to the city in which you live — to whatever entity issues the bonds — and that entity promises to pay you a certain rate of return in exchange for borrowing your money. Bond investing is very different from stock investing, where you purchase shares in a company, become an alleged partial owner of that company, and then start to pray that the company turns a profit and the CEO doesn’t pocket it all.

Stocks (which really aren’t as bad as I just made them sound) and bonds complement each other like peanut butter and jelly. Bonds are the peanut butter that can keep your jelly from dripping to the floor. They’re the life rafts that can keep your portfolio afloat when the investment seas get choppy. And yes, bonds are handy as a source of steady income, but, contrary to popular myth, that shouldn’t be their major role in most portfolios.

Bonds are the sweethearts that may have saved your grandparents from selling apples on the street during the hungry 1930s. (Note that I’m not talking about high-yield “junk” bonds here.) They’re the babies that may have saved your 401(k) from devastation during the three growly bear-market years on Wall Street that started this century. In 2008, high-quality bonds were just about the only investment you could have made that wound up in the black at a time when world markets frighteningly resembled the Biblical Red Sea. And in February and March of 2020, when COVID unleashed itself upon the world and the Dow dropped 37 percent over the course of several days? Yup, bonds were the place to be.

Bonds belong in nearly every portfolio. Whether or not they belong in your portfolio is a question that this book will help you answer.

About This Book

Allow the following pages to serve as your guide to understanding bonds, choosing the right bonds or bond funds, getting the best deals on your purchases, and achieving the best prices when you sell. You’ll also find out how to work bonds into a powerful, well-diversified portfolio that serves your financial goals much better (I promise) than day-trading stock options or attempting to make a profit flipping real estate in your spare time.

I present to you, in easy-to-understand English (unless you happen to be reading the Swedish or Korean translation), the sometimes complex, even mystical and magical world of bonds. I explain such concepts as bond maturity, duration, coupon rate, callability (yikes), and yield. And I show you the differences among the many kinds of bonds, such as Treasuries, agency bonds, corporates, munis, zeroes, convertibles, strips, and TIPS.

Because this book is the all-new and thoroughly updated third edition, I also fill you in on some important goings-on in the bond world over the past decade. Notably, I cover the COVID crash of early 2020 and the “rush to safety” that made bonds, especially US Treasury bonds, the belle of the ball. I also discuss less cheerful times for bonds, starting with the super-low interest rates of the past decade or so, culminating in early-to-mid 2022 with a sudden, steep rise in interest rates, bringing a serious sag in bond prices.

Since I wrote the first and second editions of this book, the number and types of bond funds in which investors can now sink their money has virtually exploded, for better or worse. Many of these new funds (mostly exchange-traded funds) are offering investors slices of the bond market, often packaged in a way that makes bond investing trickier than ever.

In this book, you discover the mistakes that many bond investors make, the traps that some wily bond brokers lay for the uninitiated, and the heartbreak that can befall those who buy certain bonds without first doing their homework. (Don’t worry; I walk you through how to do your homework.) You find out how to mix and match your bonds with other kinds of assets — such as stocks and real estate — taking advantage of the latest in investment research to help you maximize your returns and minimize your risk.

Here are some of the things that you need to know before buying any bond or bond fund — things you’ll know cold after you read Bond Investing For Dummies, 3rd Edition:

• What’s your split gonna be? Put all of your eggs in one basket, and you’re going to wind up getting scrambled. A key to successful investing is diversification. Yes, you’ve heard that before — so has everyone — but you’d be amazed how many people ignore this advice.

  Unless you’re working with really exotic investments, the majority of most portfolios is invested in stocks and bonds. The split between those stocks and bonds — whether you choose an 80/20 (aggressive) portfolio (composed of 80 percent stocks and 20 percent bonds), a 50/50 (balanced) portfolio, or a 20/80 (conservative) portfolio — is possibly the single most important investment decision you’ll ever make. Stocks and bonds are very different kinds of animals, and their respective percentages in a portfolio can have, will have, a profound impact on your financial future. Chapter 12 deals with this issue directly, but the importance of properly mixing and matching investments pops up in other chapters as well.

• Exactly what kind of bonds do you want? Depending on your tax bracket, your age, your income, your financial needs and goals, your need for ready cash, and a bunch of other factors, you may want to invest in Treasury, corporate, agency, or municipal bonds. Within each of these categories, you have other choices to make: Do you want long-term or short-term bonds? Higher quality bonds or higher yielding bonds? Freshly issued bonds or bonds floating around on the secondary market? Bonds issued in the United States or bonds from Mexico or Japan? I introduce many different types of bonds in Part 2, and I discuss which may be most appropriate for you — and which are likely to weigh your portfolio down.
• Where do you shop for bonds? Although bonds have been around more or less in their present form for hundreds of years (see a brief history of bonds in Chapter 3), the way you buy and sell them has changed radically in recent years. Bond traders once had you at their tender mercy. You had no idea what kind of money they were clipping from you every time they traded a bond, allegedly on your behalf. That’s no longer so. Whether you decide to buy individual bonds or bond funds (Chapter 14 helps you make that thorny decision), you can now determine almost to the dime how much the hungry brokers intend to nibble — or have...