Thread by @finance_hipster

Do you own bonds in your portfolio?

Many don’t.

They’re boring, they don’t really grow, and they pay... almost nothing.

Let’s go through a few types of bonds — AND why I currently hold hold them (*disclaimer - not investment advice for YOU)

1️⃣ WHY?

Current savings account interest rates are low. Like REALLY low (Ally just lowered to 0.60% down from 2.25% two years ago or so).

Inflation is pegged around 2%. That means your bank is actually losing money over time.

It’s like having a hole in your wallet...

👇🏻

This is where bonds and bond like funds come in, for me.

After talking with @andyisom100K and @javyandrade , I started tinkering with a portfolio of several types of these funds to park some of my savings (not all!) — to allow it to grow.

Let’s go through them to learn.

👇🏻

First, let’s get this out of the way — WHAT is a bond?

A bond is a way for a company or government (like the US government) to raise capital, by issuing a bond to a buyer agreeing to borrow money from them and pay it back by a select date, as well as pay interest at set times.

Bonds are often susceptible to interest rates, just like banks (and your savings rates in them).

Due to this, some also pay very low interest amounts.

Like all loans, essentially, there is risk of default with a bond. So be weary.

Now that we know what a bond is — let’s go through types of bonds.

I’ve selected 5 bonds or similar for my portfolio:

✅ US Treasury Bonds
✅ Municipal Bonds
✅ High Yield Bonds
✅ Preferred Stock
✅ Large stable Dividend paying company stock

Ready to learn?

👇🏻

First, the standard US government treasury bond — T bond for short!

Safe, reliable, slow returns. Like very slow returns.

Often labeled as boring.

These average about a 1% return. Some are pegged for inflation boosts.

But almost guaranteed.

Needed for stability.

👇🏻

Second,

Municipal bonds (called Muni Bonds) — state and local government bonds to raise capital. These pay at somewhat similar rates as T bonds, BUT with a fun catch.

Many of them are federal TAX FREE.

So your little, safe growth is also a little bigger being tax free.

Third,

High Yield Bonds — with riskier companies where the chance of default is higher.

While these would be terrible for ALL your money, they can be a good way to increase your overall income from bonds.

And thats my plan, right? So I mix some of these in to earn more.

Fourth, we can look for things that ALMOST act like bonds, but pay more.

That leads us to PREFERRED STOCK. Companies issue preferred stock to raise capital with investors (like a bond), but it pays out dividends at regular intervals similar to bond interest payments.

👇🏻

These are more risky, like stocks, but also tend to be less volatile than common stock.

Like high yield bonds, not ideal for your whole portfolio. But as a piece of my overall pie, these increase my income while still having lower risk than common stock.

👇🏻

Lastly, there are stable long time dividend paying stocks.

Companies like Verizon or Johnson and Johnson. Companies that have performed reasonably well through uncertain economic times, and still paid a dividend throughout.

Again, higher risk — but higher reward.

My thoughts are that with the right mix, a portfolio of the above could lead to a much better yield than a high yield savings account (much higher than 0.60%)

AND would likely still be liquid and relatively low risk compared to a normal ETF or common stock.

👇🏻

My current mix is paying close to 4% — but likely has more risk than is ideal.

It’ll probably take some adjusting over time.

But it’s a fun experiment with money I can risk.

There likely is no perfect solution here.

But bonds and bond like funds can be a great tool for money you don’t want to expose to too much risk.

Should a crisis come, your money wouldn’t likely be down 30% for months WHEN you need it. And it would pay income when you don’t.

In sum, my bond ‘fund’ currently contains:

▫️ T Bonds - for stable income
▫️ Muni Bonds - for tax free stable income
▫️ High Yield Bonds - for larger but risky income
▫️ Preferred Stock - higher income but risky
▫️ Safer Dividend Stocks - risky but high income

👇🏻

I’m placing about 20% of my emergency fund in this mix to allow it growth, and see how it performs. I may adjust that amount depending on what I see.

I hope you learned a thing or two — if so, SMASH that RT button so others can too!

Until next time, stay hip 😎