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Investing in Bonds: Tips for Building a Diversified Portfolio

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Learn how to invest in bonds, why they're a great hedge, and tips for building a diversified portfolio.

Description: A graph showing the returns of different asset classes, such as stocks, bonds, and cash.

Bonds are a type of investment that allow individuals to lend money to governments, corporations, or other organizations. They are designed to protect investors from inflation, and are a great hedge against stock market volatility. A popular type of bond is the I Bond, which has a current interest rate of 6.89%. This rate will last until the end of 2020.

A diversified portfolio consists of multiple asset classes like stock, Bonds, and cash. The ratio of each asset should be held according to your risk tolerance, goals, and time horizon. For example, if you’re planning on retiring in the next 10 years, you may want to shift more of your portfolio into Bonds, since they are less volatile than stock and offer a steady stream of income.

According to Brent Schutte, chief investment officer with Northwestern Mutual, Bonds offer an attractive hedge against stock market volatility and can help provide a layer of stability to your portfolio. Schutte recommends that investors consider allocating between 20-40% of their portfolios to Bonds, depending on their risk tolerance and goals.

If you’re looking to invest your money into U.S. Treasury Bonds, there are a few different types to choose from. Treasury Bonds (T-Bonds) are long-term securities with a maturity of over 10 years, and are backed by the full faith and credit of the U.S. government. Treasury notes (T-Notes) are medium-term securities with a maturity of 2-10 years. Treasury bills (T-Bills) are short-term securities with a maturity of less than one year.

Another option to consider are junk Bonds. These are high-yield debt securities that are issued by companies with low credit ratings. Although they offer higher yields than other types of Bonds, they also come with more risk. If you believe that a recession seems imminent and interest rate are rising, these may be a good option. Francis Rodilosso runs the Van Eck Fallen Angel High Yield Bond ETF, which offers exposure to these types of Bonds.

Another option you may want to consider are college savings plans. These typically offer an array of investment options, including age-weighted funds that get more conservative over time. This can be a great way to save for a child’s education, while also diversifying your portfolio.

Finally, if you’re looking for higher yields, you may want to focus on money market funds, C.D.s, Treasury bills, and other options. These are generally considered to be low-risk investment, and are offering higher yields than stock and Bonds.

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