With the stock market in somewhat erratic territory in recent weeks, some people may be wondering if there is a more stable place to invest, especially if they are planning to retire any time soon.
Bonds have historically been a safe, reliable investment and most personal finance and retirement planning experts say they should be part of every retirement plan.
Bonds can be issued by businesses or a government (city, county, state, or federal), and when you buy a bond, you are essentially making a loan to the business or government entity. Most bonds are issued by governments because, historically speaking, governments are stable and can raise taxes to pay their obligations. With bonds, the issuer agrees to pay you back on a specific date and at a specific interest rate.
Related: Tony Robbins’ blunt advice about IRAs and other surprising retirement decisions
Bonds are different from stocks in that you don’t “own” a piece of the company or government body that issued the bond, so in the case of the business, you’re not going to see higher returns if the company does well. But neither will your investment suffer if the company or entity doesn’t do as well — as long as its loan payments are current.
The bottom line is that bonds offset some of the volatility that comes with owning stocks.
Tony Robbins says bonds should be part of an investment portfolio’s “security” bucket.
Shutterstock
Tony Robbins explains why bonds are an important part of a retirement investment plan
Bonds are “the big guns in the portfolios of the ultrawealthy,” writes Robbins, “and the bedrock of the Security/Peace of Mind Bucket for the average investor.” However, when interest rates are low—as they were for more than a decade—they’re not necessarily so great anymore.
However, most experts like Robbins believe bonds are still an important part of any investment mix.
Bonds are considered a stable investment and are less likely to lose money than stocks are. They also pay interest on a regular basis — sometimes quarterly or semi-annually, which can make them a predictable source of income during retirement. They are also safer than the stock market. Bonds are even where some people “park” their emergency cash savings since bonds are relatively liquid.
Finally, some bonds also provide tax-free income, although tax-free bonds tend to pay lower rates than taxable bonds.
More on Tony Robbins:
Tony Robbins warns Americans on Social Security mistake to avoidPhilanthropist warns U.S. workers on retirement, Social SecurityTony Robbins has blunt words on Social Security and retirement
“Bonds can be such a potentially important investment for your Security Bucket,” writes Robbins.
Related: Tony Robbins has blunt words on a major Social Security fear
Tony Robbins explains the differences between the most common types of bonds
“Bonds are the foundation of the mind-blowing portfolio that work in all economic climates,” writes Robbins.
US Treasury Bonds
Many investment experts believe the safest bonds are U.S. Treasuries. Investors do have to pay federal income tax on interest from U.S. treasury bonds, but generally you don’t have to pay state income tax.
There are four different types of treasuries, and they all have different maturity rates:
T-Bills are a short-term bond that matures in less than 12 months. “They are the basis for most short-term bond index funds and money market funds,” explains Robbins. T-Notes mature in one to ten years and offer fixed interest rates. You get interest payments on these bonds every six months. T-Bonds, like T-notes, mature in ten to 30 years. Treasury inflation-protected securities (TIPS) protect against spikes in inflation. When you buy TIPS, explains Robbins, the principal of the bond goes up or down when the consumer price index on inflation changes — and so does the semiannual interest payment. When you buy TIPS it’s likely because you believe we’re heading into a period of inflation.
Corporate Bonds
Corporations issue bonds when they want to raise money to expand, acquire other businesses, pay dividends, or fund a loss, among other reasons. Robbins warns that purchasing the “wrong” bond risks some or all of your investment, noting even companies like TWA and Kodak have gone bankrupt. On the other hand, companies like Apple sell bonds that are considered very safe.
Municipal Bonds
When a government entity such as a state, city or county needs to raise funds to build something like a hospital, new sewer system or enhance mass transit, the branch borrows money by issuing a bond. Municipal bonds used to be considered a safe bet, says Robbins, but with so many cities bankrupt or on the verge of bankruptcy and then shareholders are left holding the empty bag. “Once you acknowledge the risks, there can be some great opportunities in municipal bonds if you know where to look,” Robbins says.
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
