Bond Investing For Dummies

Title Page
Copyright Page
Table of Contents
Introduction
About This Book
Conventions Used in This Book
What You’re Not to Read
Foolish Assumptions
How This Book Is Organized
Part 1: A Quick Guide to the Fixed-Income Universe
Part 2: Bonds of Many Distinct Flavors
Part 3: Bonds as Portfolio Cement
Part 4: A Manual for Smart Bond Shopping
Part 5: Bonds as Good Friends of Retirees
Part 6: The Part of Tens
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1 A Quick Guide to the Fixed-Income Universe
Chapter 1 Buying Bonds: In Your Best Interest
Understanding What Makes a Bond a Bond
Choosing your time frame
Picking who you trust to hold your money
Recognizing the difference among bonds, stocks, and cryptocurrencies
Why Hold Bonds? (Spoiler Alert: It Isn’t to Make You Rich)
Identifying the best reason to buy bonds: Diversification
Going for the cash
Investing in an Era of Low, Low Interest Rates
All this fuss about the Fed
Real (after-inflation) interest rates matter most
Don’t get depressed over depressed rates
Introducing the Major Players in the Bond Market
Supporting (enabling?) your Uncle Sam with Treasury bonds
Collecting corporate debt
Demystifying those government and government-like agencies
Going cosmopolitan with municipal bonds
Buying Solo or Buying in Bulk
Picking and choosing individual bonds
Going with a bond fund or funds
Chapter 2 Constructing Your Portfolio’s Foundation
Focusing on Your Objectives
Deciding what you want to be when you grow up
Picturing your future nest egg
Understanding the Rule of 20 (preferably 25)
Choosing your investment style
Making Your Savings and Investment Selections
Saving your money in safety
Investing your money with an eye toward growth
Understanding Five Major Investment Principles
1. Risk and return are two sides of the same coin
2. Financial markets are largely efficient
3. Diversification is just about the only free lunch you’ll ever get
4. Reversion to the mean — it means something
5. Investment costs matter — a lot!
Chapter 3 A (Mostly) Heroic History of Bonds
Reviewing the Triumphs and Failures of Fixed-Income Investing
Beating inflation, but not by very much
Serving a savoir in times of distress. . .
Looking Back Over a Long and (Mostly) Distinguished Past
Yielding returns to generations of your forebearers
Gleaning some important lessons
Realizing How Crucial Bonds Are Today
Viewing Recent Developments, Largely for the Better
Chapter 4 Interest, Sweet Interest
Calculating Rates of Return — Tougher than Deciphering Babylonian
Cutting deals
Changing hands
Embracing the complexity
Conducting Three Levels of Research to Judge the Desirability of a Bond
Level one: Getting the basic information
Level two: Finding out intimate details
Level three: Examining the neighborhood
Understanding (and Misunderstanding) the Concept of Yield
Coupon yield
Current yield
Yield-to-maturity
Yield-to-call
Worst-case basis yield
The 30-day SEC yield
Appreciating Total Return (This Is What Matters Most!)
Figuring in capital gains and losses
Factoring in reinvestment rates of return
Allowing for inflation adjustments
Weighing pretax versus posttax
Measuring the Volatility of Your Bonds
Time frame matters
Quality counts
The coupon rate matters, too
Foreign bonds, added risk
Revisiting the Bonds of Babylonia
Interest short run, interest long run
Interest past, interest future
Part 2 Bonds of Many Distinct Flavors
Chapter 5 US Treasury Bonds: As Safe as Safe Can Be
Investing with Uncle Sam in Myriad Ways
Savings bonds as gifts or small investments
Treasury bills, notes, and bonds for more serious investing
Treasury inflation-protected securities (TIPS)
Easing Your Fears of Default
Deciding Whether, When, and How to Invest in Treasuries
Figuring out whether you want Treasuries
Picking your own maturity
Adding in some inflation protection
Entering the Treasury Marketplace
Buying direct or through a broker
Choosing a new or used bond
Tapping Treasuries through mutual funds and exchange-traded funds
Chapter 6 Getting Down to Business: Corporate Bonds
Why Invest in These Sometimes Pains-in-the-Butt?
Comparing corporate bonds to Treasuries
Considering historical returns
Getting Moody: The Crucial Credit Ratings
Revisiting your ABCs
Gauging the risk of default
Special Considerations for Investing in Corporate Debt
Calculating callability
Coveting convertibility
Reversing convertibility —imagine that
Appreciating High Yield for What It Is
Anticipating good times ahead
Preparing for the bad times
Investing in high yields judiciously
Chapter 7 Powerful and a Tad Mysterious: Agency Bonds
Identifying the Bond Issuers
Slurping up your alphabet soup
Separating federal agency bonds from GSEs
Sizing up the government’s actual commitment
Introducing the agency biggies
Comparing and Contrasting Agency Bonds
Eyeing default risks, yields, markups, and more
Weighing taxation matters
Discos, floaters, and step-ups
Banking Your Money on Other People’s Mortgages
Bathing in the mortgage pool
Deciding whether to invest in the housing market
Considering Agencies for Your Portfolio
Chapter 8 (Practically) Tax-Free: Municipal Bonds
Appreciating the Purpose and Power of Munis
Sizing up the muni market
Comparing and contrasting with other bonds
Delighting in the diversification of municipals
Knowing That All Cities (Bridges or Ports) Are Not Created Equal
Dealing with the rare default
Enjoying low risk
Choosing from a vast array of possibilities
Consulting the Taxman
Bringing your bracket to bear
Singling out your home state
Matching munis to the appropriate accounts
Recognizing Why This Chapter Is Titled “(Practically) Tax-Free: Municipal Bonds”
Reckoning with the AMT tax
Capping your capital gains
Introducing the fully taxable muni
Buying Munis Made Easier
Chapter 9 International Bonds and Other Seemingly Exotic Offerings
Traveling Abroad for Fixed Income
Dipping into developed-world bonds
Embracing the bonds of emerging-market nations
Bond Investing with a Conscience
Having faith in church bonds
Adhering to Islamic law: Introducing sukuk
Sustainability-linked bonds
Playing with Bond Fire: Potentially Risky Bond Offerings
Rocking with Bowie Bonds
Cashing in on catastrophe bonds
Dealing in death
Dancing in the Flames: Derivatives and Default Bond Products
Daring to delve into derivatives
Banking on losses with defaulted bond issues
Catching a fallen angel
Evaluating Exchange-traded Notes
What are they?
Should you invest?
Part 3 Bonds as Portfolio Cement
Chapter 10 Return, Risk, and Realism
Searching, Searching, Searching for the Elusive Free Lunch
Making a killing in CDs . . . yeah, right
Defining risk and return
Appreciating Bonds’ Risk Characteristics
Interest rate risk
Inflation risk
Reinvestment risk
Default risk
Downgrade risk
Tax risk
Fear-of-missing-out (FOMO) risk
Regarding all these risks . . .
Reckoning on the Return You’ll Most Likely See
Calculating fixed-income returns: Easier said than done
Looking back at history: An imperfect but useful guide
Investing in bonds despite their lackluster returns
Finding Your Risk-Return Sweet Spot
Allocating your portfolio correctly
Tailoring a portfolio just for you
Chapter 11 The Art and Science of Portfolio-Building
Mixing and Matching Your Various Investments
Dreaming of limited correlation
Seeking zig and zag with Modern Portfolio Theory
Translating theory into reality
Appreciating Bonds’ Dual Role: Diversifier and Ultimate Safety Net
Protecting yourself from perfect storms
Eyeing a centuries-old track record
Recognizing Voodoo Science
Comparing actively managed funds to index funds
Forecasting the future — and getting it wrong
Ignoring the hype
Chapter 12 Slicing the Pie: How Much Should Be in Bonds?
Why the Bond Percentage Question Isn’t As Simple As Pie
Minimizing volatility
Maximizing return
Peering into the Future
Estimating how much you’ll need
Assessing your time frame
Factoring in some good rules
Recognizing yourself in a few case studies
Noticing the Many Shades of Gray in Your Portfolio
Bonds of many flavors
Stocks of all sizes and sorts
Other fixed income: Annuities
Other equity: Commodities and real estate
Making Sure That Your Portfolio Remains in Balance
Tweaking your holdings to temper risk
Savoring the rebalancing bonus
Scheduling your portfolio rebalance
Chapter 13 Making Your Preliminary Bond Choices
Reviewing the Rationale behind Bonds
Making your initial selection
Following a few rules
Sizing Up Your Need for Fixed-Income Diversification
Diversifying by maturity
Diversifying by type of issuer
Diversifying by risk-and-return potential
Diversifying away managerial risk
Weighing Diversification versus Complication
Keeping it simple with balanced funds (for people with less than $2,000)
Moving beyond the basic (for people with $2,000 to $4,000)
Branching out (with $4,000 or more)
Finding the Perfect Bond Portfolio Fit
Case studies in bond ownership
Seeking out the more exotic offerings
Part 4 A Manual for Smart Bond Shopping
Chapter 14 Planning Your Bond Buys and Sells
Discovering the Brave New World of Bonds
Finding fabulously frugal funds
Dealing in individual bonds without forking over a fortune
Deciding Whether to Go with Bond Funds or Individual Bonds
Calculating the advantages of funds
Considering whether individual bonds or bond funds make more sense
Is Now the Time to Buy Bonds?
Predicting the future of interest rates . . . yeah, right
Paying too much attention to the yield curve
Adhering — or not — to dollar-cost averaging
Choosing between Taxable and Tax- Advantaged Retirement Accounts
Positioning your investments for minimal taxation
Factoring in the early-withdrawal penalties and such
Chapter 15 Diving (Carefully!) into the Individual Bond Marketplace
Navigating Today’s Bond Market
Getting some welcome transparency
Ushering in a new beginning
Dealing with Brokers and Other Financial Professionals
Identifying the role of the dealer
Do you need a broker or agent at all?
Selecting the right broker or agent
Checking the dealer’s numbers
Hiring a financial planner
Doing It Yourself Online
If you’re looking to buy
If you’re looking to sell
Perfecting the Art of Laddering
Protecting you from interest rate flux
Tinkering with your time frame
Discount bonds or premium bonds?
Buying and Selling an Individual Bond: My Own Journey
Chapter 16 Choosing Bond Funds Wisely
Defining the Basic Kinds of Funds
Mining a multitude of mutual funds
Establishing a position in exchange-traded funds
Considering an alternative: Closed-end funds
Understanding unit investment trusts
Knowing What Matters Most in Choosing a Bond Fund of Any Sort
Selecting your fund based on its components and their characteristics
Pruning out the underperformers
Laying down the law on loads
Sniffing out false promises
My Picks for Some of the Best Bond Funds
Short-term, high-quality bond funds
Intermediate-term Treasury bond funds
(Mostly) high-quality corporate bond funds
Junk city: Corporate high-yield funds
Agency bond funds
Municipal bond funds: Taxes be damned
Taxable Muni Bonds
Global and International bond funds
Emerging market bond funds
All-in-one bond funds
Instant-Ladder, Defined-Maturity Bond Funds (Government, Corporate, Municipal)
All-in-one bond and stock funds
Target-retirement date funds (otherwise known as life-cycle funds)
Part 5 Bonds as Good Friends of Retirees
Chapter 17 Satisfying Your Need for Steady Cash
Reaping the Rewards of Your Investments
Aiming for freedom
Estimating your target portfolio
Lining up your bucks
Finding Interesting Sources of Interest
Certificates of deposit (CDs)
Mining the many money market funds
Banking on online savings accounts
Considering the predictability of an annuity
Hocking your home with a reverse mortgage
Recognizing that Stocks Can Be Cash Cows, Too
Focusing on stocks with sock-o dividends
Realizing gain with real estate investment trusts (REITs)
Taking a middle ground with preferred stock
Introducing a Vastly Better Way to Create Cash Flow: Portfolio Rebalancing
Buying low and selling high
Rolling bond interest back in
Dealing with realities
Chapter 18 Ensuring Financial Security in Old Age
Looking Ahead to Many Years of Possible Portfolio Withdrawals
Knowing Where the Real Danger Lies: The Risk of Being Too Conservative
Considering an aggressive approach
Easing back toward your comfort zone
Setting your default at 60/40
Allowing for adjustments to suit the times
Choosing my own and your ultimate ratio
Calculating How Much You Can Safely Tap
Revisiting risk, return, and realistic expectations
Basing your retirement on clear thinking
Making the Most Use of Uncle Sam’s Gifts
Minimizing income is the name of the game
Lowering your tax bracket through smart withdrawals
Part 6 The Part of Tens
Chapter 19 Ten Most Common Misconceptions about Bonds
A Bond “Selling for 100” Costs $100
Buying a Bond at a Discount Is Better Than Paying a Premium, Duh
A Bond Paying X% Today Will Pocket You X% Over the Life of the Bond
Rising Interest Rates Are Good (or Bad) for Bondholders
Certain Bonds, Such as Treasuries, Are Completely Safe
Bonds Are a Retiree’s Best Friend
Individual Bonds Are Usually a Better Deal than Bond Funds
Municipal Bonds Are Free of Taxation
A Discount Broker Sells Bonds Cheaper
The Big Risk in Bonds Is the Risk of the Issuer Defaulting
Chapter 20 Ten Mistakes Bond Investors Need to Avoid
Allowing the Broker to Churn You
Not Taking Advantage of TRACE
Choosing a Bond Fund Based on Short-Term Performance
Not Looking Closely Enough at a Bond Fund’s Expenses
Going Through a Broker to Buy Treasuries
Counting Too Much on High-Yield Bonds
Paying Too Much Attention to the Yield Curve
Buying Bonds That Are Too Complicated
Ignoring Inflation and Taxation
Relying Too Heavily on Bonds in Retirement
Appendix:
Helpful Web Resources for Successful Bond Investing
Index
EULA