Everybody gives the same financial advice: “Diversify your portfolio!” The problem is, most folks saying that only diversify their stocks, keeping their savings in the volatile stock market. Bonds are, and have been, an essential part to any investor’s portfolio and are considered to be more conservative than stocks. But what exactly are bonds?

What is a Bond?

In the simplest of terms, bonds are debt securities. When an organization needs a loan, they can issue a bond to finance it. An investor will purchase the bond and, after a set amount of time, the bond issuer will repay the principal amount of the bond. During the life of the bond, the issuer will pay the investor a fixed amount of interest. For many, bonds have been a safe and conservative investment because of these fixed rates.

Types of Bonds

There are many different kinds of bonds available. We’ll cover the 4 most common bonds here:

Government Bonds – generally the safest kind of bond because it is backed by the government. Also, because of it’s safety, government bonds will typically have low interest rates.
Municipal Bonds – similar to government bonds, they are issued by a state, municipality or county. Also, these bonds are typically exempt from federal taxation.
Mortgage Bonds – these bonds are backed by real estate. They are normally safer than corporate bonds and stocks as well, because if a homeowner cannot pay their mortgage, a bondholder will have their bond repaid through the liquidation of the property.
Corporate Bonds – the riskiest kind of bond, these are backed by corporations, but not real assets. If an issuer goes out of business, the bondholder may not get paid. Because of this inherent risk, these bonds have higher interest rates, in order to entice investors.

The Bottom Line

A healthy retirement plan has a variety of financial vehicles for the purpose of growing wealth and generating a guaranteed income. Because of the relative safety of bonds, they have been viewed as a foil to ‘risky’ stocks. When preparing to invest your retirement savings, it is critical to have someone with knowledge of the financial world and someone trustworthy, doing what is right for you. If you need help putting together a retirement plan or if you simply want a second opinion, now is the time to call Capital Financial. Coach Pete D’Arruda and the team want to help you create a plan that will get you the retirement you want.