Understanding Bonds: The “Safe Bet” in Your Portfolio?

Speaker A00:00:00

I got this email and I said, you know what, this is a great way to frame this question. Here's the email, Ralph. People keep saying bonds are the safe bet. What does that really mean?Are they guaranteed or do they come with their own risks? And I bet you're probably thinking the exact same thing. So today on the show, I want to break down bonds because I want you to fully understand them.I want you to understand why people use them and, and how they fit into your financial life. Because it's so important that you understand the basics of this because these are a great thing to use as a balanced part of your portfolio.Let's get to it.On today's show, this is Financially Confident Christian, your daily dose of gospel, grounded insight and faith driven tips to help you break the cycle of financial shame with confidence. Hello and welcome back to Financially Confident Christian. And I am so happy that you've chose to give me just a little bit of your time.My passions in life is to really give back to people. I've spent 30 years doing financial work. I've spent 30 years working with small business clients and individuals.And I bet you're probably one of those people as well. You've tuned into the show, you're thinking, oh, this looks pretty interesting. Financially Confident Christian.Yes, I want to be a financially confident Christian. But I'm Ralph and I'm here to help you break that cycle of financial shame that so many people find themselves in.I found myself in that so many times. And if you missed yesterday's show, I had a great discussion. We talked about stocks.And one of the things that I love to talk about is how to break things down in just simple English. And what we agreed to yesterday was stock is nothing more than ownership in a company.But I really stressed yesterday how they matter for long term growth. So if you missed yesterday's show, here's the great part.You can go find all of our shows at financiallyconfidentchristian.com but today, like I said, we're going to talk about bonds. And a lot of people say, rob, I have no idea what bonds are. A lot of people say, hey, these are really safe investments.But I want you to know some things that you should understand before you choose to use them. I remember one thing. Here's a great way to explain this. Somebody said to me the other day, Ralph, can't you explain these bonds to me?I just don't get it. And I thought back to when my son first started driving, hey, if you have teenage children or maybe they're out of the nest like mine are now.But I remember he came to me one day. He said, dad, I need 20 bucks for gas.He said, my paycheck's gonna be coming in on Friday, and I promise you I'll pay you back, even give you a couple bucks of interest. And so you know what? I'm a good dad. I gave him the 20 bucks. I said, hey, enjoy. Go fill up your tank with gas.And when his paycheck came in, he absolutely gave me back that 20 bucks. He also gave me $5 extra just to show that he was good for it. Now, of course, I didn't take his extra five bucks. I'm not gonna take your five bucks.That's not cool. But that's really how bonds work. Bonds work the same way as an investment. Basically, what you're doing is you're lending somebody money.Could be a government, could be a city.You see a lot of these, what they call municipal bonds or government bonds could be a company, individual company, and they agree to pay you back later. And while you have that loan, that's basically what it is. While they have that loan, they give you interest. It's really that simple.What do you think? Not that complicated, is it? But now let's talk about what bonds are in a little bit more detail. Like I said, a bond is simply a loan.You're the lender. So think about it like this. You become the lender. You're kind of like the bank, if you will, and the borrower promises to repay you.They're not going to just pay you back what you gave them, but they're going to give you some interest as well. Now, generally, there are two direct types of bonds. There's government bonds and there's corporate bonds.Government bonds, or you've heard this term U.S. treasury bonds. Those usually carry the lowest risk because they're backed on the full faith and credit of the United States government.Now, we could have a discussion about whether the US Government is a good entity to invest in or not, but that's not for today's episode. But because they have low risk, as we talked about the other day, when things have low risk, they generally have a low return as well.So that's what we're talking about. We say government bonds. Now, the other side of that is what's called corporate bonds. These are bonds that are owed by individual companies.Now, because they're not backed by the full faith and credit of the United States government or another entity, maybe a city or state, they have a Higher risk. But with that higher risk comes a higher reward. Now, municipal bonds, these are offered by states or cities. And the benefit to those generally.Are there tax advantages? One of the hats I wear on a daily basis is a tax hat, a tax advisor hat. So there are some tax advantages to municipal bonds.So there's really three types of bonds. There's the government bonds, the corporate bonds, and municipal bonds.Now, one of the things you asked in your question today, which I think was so important to understand, why do people call these safe? There's a couple reasons for that. The first reason that people call them safe is their predictable interest payments.When they issue this bond, they put a letter, they put a document that says, I guarantee I'm going to pay you X number of dollars per interest at these particular intervals. And because it's a loan, you don't own a percentage of the company. Like that stock we talked about yesterday.If you missed yesterday's show, we talked about a pizza. And when you buy a piece of pizza, you're buying a piece of that piece.Well, with a bond, you're not buying any stock ownership, you're just giving them a loan. So by that very nature, they're less volatile than stocks because they've got a commitment to you that they've got to pay you back.Now you might be saying, Ralph, okay, well, where do people use these? People generally use these to balance your portfolio.So if you work with an investment advisor, if you work with a broker, a lot of people call them brokers. If you work with a broker, they're going to use these to help balance your portfolio. Because that's the idea.We want to make sure that we're balancing some high risk and some medium risk and some low risk thing. But let's talk about those real risk, because there are risks. You might be sitting here, Ralph. You know, there's got to be some risk to this.Of course there is. One of the big risk to bonds is inflation. Let me explain that a little bit.We've been through some really tough times with inflation lately, haven't we? Well, inflation works like this. When you buy a bond, that bond has an interest rate on it.Well, that interest rate is set at the time the bond is sold. So if six months down the road, interest rates go up, guess what? That bond is still paying you at that lower rate. So what happens in the market?There's a secondary market for these bonds. I don't want to get lost in the detail today, but there's a secondary market for these bonds.So when interest rates are rising, that bond becomes less valuable. So if you wanted to sell that bond before the end of the investment's over, you're going to get a lower price for that. So there is some risk in that.But in general, the risk only comes from that inflation. Risk default is rare, but there are times when bonds are defaulted on. I've seen it happen with municipalities. You may have seen this in the news.The city went bankrupt, this municipality went bankrupt. So you can lose your money, you know, if you loan your friend money and your friend declares bankruptcy, guess what? You've lost your money.It works the same way with bonds. So now you might be asking, Ralph, okay, where do they fit into a portfolio?I love to use bonds when retirement is approaching because we've got to start putting that money into buckets where we know there's going to be sureness in that we don't want to be investing all our money in the market where there could be volatility, there could be something could be around the bend we're not expecting. So that's where these bonds really come into place. Because in the traditional stock market investments, there are all kinds of wild swings.Hey, open up the newspaper, turn on the market watch or whatever you watch on tv, you'll see that market is going up and down like a seesaw. So that's where a great time to use bonds. They're not a growth engine. That's the thing I need you to understand right now.It's not about, well, I'm going to put a lot of money into bonds so they'll grow, but what they are is really a stabilizer for your portfolio. Now, one of the things I do on this show is I always want to tie what I'm talking about back in the scripture.You might be saying, Ralph, okay, you're going to really stretch for this one, dude, because where are you going to find a Bible verse about bonds? Well, it's not quite about bonds, but I found this one from Ecclesiastes, chapter 11, verse 1.You might notice I've used this one many times as we go through this investment series, because it really nails what we're talking about. Again, this is Ecclesiastes chapter 11, verse 2. Invest in seven ventures. Yes. In eight. You do not know what disaster may come upon the land.And if you think about it, bonds can be one of those ventures. You may be investing in stock, you may be investing in bonds. It's all part of that diversification. It's not the whole story.You're not putting all your money into stock. I've had clients that have come in to meet with me. Think about this for a second.They had all their money in a particular company stock and that stock was doing great. The company's doing fantastic. But think about Exxon. Date myself a little bit. There was a crash up in Alaska many, many years ago by Exxon.Well, guess what happened? Exxon stock price took a hit. So if you were investing in Exxon stock, all of a sudden you've got a lot less money.So that's where these diversification really helps. Got one more Bible verse, and that's Proverbs chapter 21:5.And this is all about plans of the diligent, the plans that are diligently to profit as surely as haste leads to poverty. And see, that's where bonds reward patience and are also part of a careful planning thing.So I always want to give you an action item here on the show. What are some things that you can do to better understand bonds? So here's your homework for today.If you choose to do this, you're like, Ralph, I came to watch your show. I came to listen to your show. I wasn't expecting homework. But here's the thing.Go do some research, learn about the three types of bonds, like I said, government, corporate, and municipal, and then pray about it. Ask God right now. See God, I'm leaning on bonds for safety, or am I leaning on God for just complete security?Because that's what we really need to decide. Bonds are a good investment choice, but are we relying on that or relying on God? Let's pray together right now.Heavenly Father, we just thank You for teaching us that real security comes only from You. So we just ask right now, Lord, that You would help us be patient. Help us be wise, Lord, and guide us as we use money in ways that honor You.And we ask this in confidence in the name of Jesus. Amen. I want to ask you for a favor right now.If today's episode has helped you see bonds more clearly, can I ask you to do me a favor to share it with somebody else who's just now learning about money, the things that we do a bad job in this country, truly, I think is is sharing financial information and really sharing how finances work. And you can just send them a link to the show to send them to our website.That's financiallyconfidentchristian.com and remember, if you've got a question for the show, I would love to answer it. I love answering questions. That's what really fuels my day, to be honest with you.So if you've got a question, maybe you're sitting there right now, you're like, Ralph, I got a question for you. Simple thing you can do. Just go to justaskralph.com you put your name, your email address and put your question in there. And guess what?I'll answer it on the show. And while you're there, I'd love to give you a free copy of my book. One of the things that I love to do is write.I love to give back to people because I truly believe that when we study and we learn more things, we can become those financially confident Christians. And I want to give you a copy of my book. I just finished writing my third book.It's called How to Become a Financially Confident Christian and it's absolutely free. You can just go to this website, financiallyconfidentchristian.com/becoming that to you one more time because I don't want you to miss it.That's financiallyconfidentchristian.com/becoming now. Today we learned about bonds and how they're steady and predictable tools. They're not perfect. I hope you get that from today.And they're not risk free, but tomorrow we're going to dive into mutual funds. A lot of people ask me about this because they're so popular right now and they're a great investment for beginners.So make sure you join me tomorrow on the show when we talk about mutual funds. I just want to encourage you right now. You may start off today showing I don't know anything about bonds, but I truly believe you can do this.You really can. And together we can break that cycle of financial shame and we can do it with confidence.So as I always in the show, stay financially savvy out there. I hope to see again tomorrow and God bless you. Have a great day.