One of the shortcomings in my investment knowledge has been bonds. As a business major, stock investing — buying shares of a publicly traded corporation — has been intuitive. Investing in bonds has seemed more mysterious, largely because of the different types of bonds and the lingo unique to this investment genre.
I’ve held bond funds in my portfolio but they’ve underperformed my stocks by a large margin and failed to provide stability to my portfolio. As I prepare for retirement and more passivity in my portfolio management, I plan to become a better investor particularly in the realm of diversification. Understanding bonds is an essential part of this process and so I’ve begun to delve into this area.
Buying an individual bond is like making a loan to a government or corporate entity. I invest money in return for interest and payback of principal by the borrowing entity at the end of the loan term. The presence of a secondary market (see below) makes bond investing more complex. Understanding common bond investing terms is the foundation of grasping bond investing.