ELI5 - Why Buy Bonds?

We've talked a lot about stocks, today let's take a look at the safer side of portfolios and talk about the value of bonds.

First, How Do Bonds Work?

Bonds are loans. We're all familiar with borrowing money, whether it's mortgages, credit cards or student loans.

Regardless of how you borrow, the process typically looks like this:

1) A lender gives you money.

2) You promise to pay it back (with interest) in the future.

This is how bonds work but the roles are reversed. You become the lender. Bond issuers are the borrower and they are obligated to pay YOU back. Oh how the tables have turned.

Bond issuers are typically governments and corporations. Governments issue bonds to fund initiatives such as roads and schools. Corporations issue bonds to fund their business.

So Why Buy Bonds?

Bonds typically generate a much lower return than stocks. Returns are even lower these days given the rock-bottom interest rates. Given the poor returns, why buy them?

It all comes down to risk management. Bonds are less volatile, providing a much more stable return. This means smaller upside potential but also less downside potential. Lower rewards but lower risk. This comes especially handy during times of turmoil.

Investors with a long time horizon (or higher risk tolerance) will typically have more stocks in their portfolio, they can handle the turbulence. Those who are retiring soon (or can't stomach the rollercoaster ride) will have more bonds. It would be risky for near-retirees to own mainly stocks. A common theme in portfolios is a gradual shift from stocks to bonds as one grows older.

Bonds are a valuable investment, but their value comes not from creating wealth but from protecting it.

Comments

Today's Special: Humble Pie

You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark. Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...

Starting Really Really Small

On your desk is one of the most intimidating sights known to man. A blank page. The prospect of filling it up with anything resembling decent seems insurmountable. Staring at the long road ahead fills you with anxiety and dread. The first step is the most difficult. So we procrastinate. We " research ", we " prep ", we " plan ". We do everything except tackling the problem. We avoid the pain for as long as we can. To make a blank page less intimidating. Tear it in half. There, half as scary, twice as easy. Still too much? Do it again. And again. Keep doing it until the task is so small that it's too easy not to do. Getting starting is the hardest part. So make the hardest part as easy as possible. This doesn't guarantee amazing results, but it gets you in the game. You can't win if you don't play.

Why We Shouldn't Be Afraid of Ambiguity

Ambiguity. That fuzzy monster that chases us down darkened hallways, whispering doubts about our roadmap and feature sets. You know the feeling. You constantly wrestle with unknowns: Will users like this? Is this the right direction? Frankly, if you had a nickel for every time the answer wasn't crystal clear, well, you might actually want to chase that ambiguity down the hall. But here's the thing: ambiguity isn't your enemy. It's your dance partner. Innovation rarely happens in a land of perfect clarity. Sure, there's a time for well-defined processes. But when you're creating something new, there are bound to be more questions than answers. The key is to learn to waltz with the unknown . Embrace the experiment. Don't be afraid to throw some spaghetti at the wall and see what sticks. Focus on outcomes, not outputs. Don't get hung up on features. What problem are you trying to solve? How will you measure success? Get comfortable with "go...

Herman Ye

Search