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Patrick Martin
Patrick Martin

How To Buy Into Stocks And Bonds

In our view, the best stock market investments are often low-cost mutual funds, like index funds and ETFs. By purchasing these instead of individual stocks, you can buy a big chunk of the stock market in one transaction.

how to buy into stocks and bonds

Investing in stocks will allow your money to grow and outpace inflation over time. As your goal gets closer, you can slowly start to dial back your stock allocation and add in more bonds, which are generally safer investments.

While stocks are great for many beginner investors, the "trading" part of this proposition is probably not. A buy-and-hold strategy using stock mutual funds, index funds and ETFs is generally a better choice for beginners.

Investing in stocks is a great way to build wealth by harnessing the power of growing companies. Getting started can feel daunting for many beginners looking to get into the stock market despite the potential long-term gains, but you can start buying stock in minutes.

The role of bonds in a portfolio is nevertheless changing. While government debt yields were low, or even negative, in the years after the crisis in 2008, they still offered protection to a portfolio because their prices tended to rise when equities fell. Now that interest rates have risen, they can actually offer a competitive return versus stocks, but they might not buffer so-called risk-off moves as reliably as in the last 30 years, according to Goldman Sachs Research.

Brokerage account: When people talk about trading stocks, they're typically talking about doing so in a brokerage account. You can think of a brokerage account as your standard-issue investment account. Here are the basics:

Target Date Funds are an asset mix of stocks, bonds and other investments that automatically becomes more conservative as the fund approaches its target retirement date and beyond. Principal invested is not guaranteed.

After languishing throughout last year, growth stocks have zoomed higher. Tesla Inc. and Nvidia Corp. , for example, have jumped more than 30%. The outlook for bonds is brightening after a historic rout. Even bitcoin has rallied, despite ongoing effects from the collapse of the crypto exchange FTX.

On average, the benefits of a four-year college degree are equivalent to an investment that returns 15.2 percent per year. This is more than double the average return to stock market investments since 1950, and more than five times the returns to corporate bonds, gold, long-term government bonds, or home ownership. From any investment perspective, college is a great deal.

The QE strategy the Fed implemented at the start of the COVID-19 pandemic has been curtailed. When QE was in place, the Fed purchased longer-term securities on the open market, including U.S. Treasuries and mortgage-backed bonds. These investments added liquidity and reduced borrowing costs to encourage economic activity through more lending and investment.

Beginning in September 2022, the Fed is cutting back its bond portfolio by about $95 billion per month (only about 1% of its holdings each month) by not purchasing new securities to replace maturing bonds. The balance sheet dropped to roughly $8.3 trillion, down less than 7% from its peak in April, 2022.5

The interest rate environment across the broader bond market has changed dramatically since early 2022. In October 2022, yields on the benchmark 10-year U.S. Treasury note rose above 4%, the first time since 2010. Yields on 10-year Treasuries moderated after that point, but again topped 4% in early March 2023. In an unusual occurrence, yields on shorter-term Treasury securities are higher than the yield on 10-year and 30-year bonds. At the end of February 2023, the yield on 3-month Treasury bills stood at 4.88% and yields on 2-year Treasury notes at 4.81% compared to a yield of 3.92% on 10-year Treasury notes. This is in contrast to normal circumstances, when investors demand higher yields for bonds with longer maturities.

These are debt securities that are issued by states, cities, counties, and public enterprises to finance government projects and other expenditures. Municipal bonds are usually exempt from federal and state taxes if you purchase them from issuers in your home state.

Bonds are often quoted with a number of cost components bundled together, making it difficult to know what you're actually paying for each component. So it's important to understand any commissions or transaction fee built into the price (and indirectly the yield), as well as any additional fees.

So if you're considering investing in bonds, you don't want to look just at the coupon rate, but what the yield to maturity is to have a better idea of what your potential total return will be if held to maturity.

Interest rate: Sometimes called the "coupon rate," this is the percentage of the bond's value the issuer agrees to pay the bondholder each year. Interest rates can be either fixed or variable, and most bonds pay interest twice a year.

Maturity date: This is the date on which the issuer has promised to pay back the face value of the bond. Maturities can range from a few weeks to 30 years or more. For some bonds, the issuer reserves the option to pay off the bond before the maturity date. These are referred to as "callable" bonds.

Secondary market: This is where previously issued bonds are traded between dealers and investors, including institutions. Bond prices are allowed to float at prices set by the market.

A bond ladder is a portfolio of individual bonds with different maturity dates. The staggered maturity dates help reduce risk if interest rates fluctuate. And since many bonds generally pay out twice a year on dates that coincide with their maturity date, monthly bond income can be structured around those dates.

While stocks are issued exclusively by companies, bonds are issued by both public and private entities. Cities, states, the federal government, government agencies, and corporations issue bonds to raise capital for a variety of purposes, such as building roads, improving schools, opening new factories, and buying the latest technology.

Bonds are generally considered a less-risky asset than stocks. Still, they haven't been immune to the selloff investors experienced this year that has sent all three major stock market indexes tumbling into bear markets. The Federal Reserve has been raising interest rates to battle high inflation and most recently hiked rates by three-quarters of a percentage point for the third time in a row. The Bloomberg Global Aggregate Index of government and corporate bonds is down more than 20% since the beginning of the year, signaling the global bond market has entered a bear market for the first time in around three decades.

There is a wide variety of types of bonds, with different payment timelines and minimum investments. Most bonds offer fixed coupon rates. But the interest on the Series I Savings Bond or I bond, for example, is made up of both a fixed rate and an inflation rate, which can change every six months. The duration on bonds vary, too, with most falling between one year and 30 years.

But when bond prices move down, bond yields move up. The reasoning comes down to supply and demand within the bond market. When there is less demand for bonds, new bond issuers have to offer higher yields to attract buyers. Meanwhile, bonds with lower yields that are already on the market become less valuable by comparison.

"It's a bad year if you held bonds starting on January 1st," explains James J. Burns, certified financial planner and president of JJ Burns & Company. "It's a great year for someone who's got cash to invest."

And actually moderating how much risk you take is much easier in bonds than in stocks: If you want to have a low-volatility bond portfolio, you buy bonds with shorter durations and higher credit quality, Plecha explains. (Credit quality refers to how likely a borrower is to repay their debt. Shorter-term bonds are less volatile because you're not locking up your money as long.)

Typically when you're young, financial advisors tend to say you shouldn't have a lot of money invested in fixed income. Instead, you may want to establish an emergency fund first, and then invest money you won't need in the near future in stocks. But as you get closer to retirement, you likely want to invest in bonds because they allow you to preserve capital and have more predictability.

If you're far from retirement but have short-term goals, bonds may also make sense, she adds. For example, if you're planning to pay for a child's education, you might want to buy some bonds that mature during that child's school year so you can use that money to help with the bill. The same goes for plans to buy a home anytime soon.

"If someone is really trying to stretch for something high yielding really because it looks shiny, that may be where there could be a bit more trouble," says Adam Shealy, senior investment analyst at Homrich Berg. While higher-yield bonds may also see higher returns, there is greater risk that the issuer will default on the debt.

There are many different ways to buy bonds, and the process is sometimes (but not always) as easy as buying stocks or ETFs. You can head to to buy bonds directly from the federal government. Money has a whole guide to buying I bonds this way.

Choosing the right mix of stocks and bonds can be one of the most basic yet confusing decisions facing any investor. In general, the role of stocks is to provide long-term growth potential and the role of bonds is to provide an income stream. The question is how these qualities fit into your investment strategy.

Even within the world of stocks, there are variations in risk and reward. "Blue chip" stocks are issues of companies that are well established within their respective industries and have long histories of producing earnings and paying dividends.Small capitalization, or "small cap," stocks represent shares in companies that are less established. Because of this, they have the potential for tremendous growth, which can translate into a large return for investors. Coupled with this, however, is a higher potential for decrease in their value than you would expect from well-established companies. 041b061a72


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