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I've heard that bonds are important for a diversified investment portfolio. But where do I buy them? Here's a short list of places to buy bonds online:
I can buy U.S. Treasury bonds at TreasuryDirect.gov. Start by opening an online account per detailed instructions here. This process is similar to establishing a brokerage account, except that I'll validate my account with one-time passcode received from from TreasuryDirect instead of trial deposits in my bank account.
The minimum and maximum investment varies based on the type of bond.
My choices include:
To place an order, I authorize a purchase with funds from my bank account. Alternatively, I can accumulate funds in TreasuryDirect through a payroll deposit or bank transfers; and then purchase bonds when I have enough money.
Corporations (direct purchase)
Corporations may sell bonds directly to individual investors. For example, I can invest in SolarBonds offered by SolarCity. In this case, I can buy bonds at various terms from three months to 15 years for a minimum investment of $1,000.When I buy directly from the corporation, I'll avoid investment fees.
A prospectus is available to explain the risk associated with the investment. In addition to reading through this info, I'll investigate whether I can sell the bonds on the open (secondary) market.
My 401(k) plan
A popular 401(k) investment choice (and often the default option selected by plan administrators) is the target-date fund.
Generally, a target-date fund consists of both stock funds and bond funds. The mix of stocks and bonds is allocated according to my time horizon, which is associated with the number of years between now and my retirement year. As the target date of retirement draws near, typically the percentage of bond holdings increases. Fees are embedded in the target-date fund itself as well as the funds the fund holds.
For example, as of 12/30/15, the Vanguard Target Retirement 2015 Fund (VTXVX) has 50% of its holdings in bond funds consisting of Vanguard Total Bond Market II Index Fund Investor Shares, Vanguard Total International Bond Index Fund Investor Shares, and Vanguard Short-Term Inflation-Protected Securities Index Fund Investor Shares.
Individual issues of U.S. Treasury, municipal, and corporate bonds are often available through brokerage firms. Generally, I can find new issues or secondary offerings by using bond screening tools or looking under Fixed Income products; minimums may be $5,000 or higher.
Bond mutual funds and ETFs are readily available through brokerage firms. Such funds may contain investment grade bonds, high-yield or junk bonds, municipal bonds, etc. I can buy and sell shares in bond funds in the same way I purchase and redeem stock mutual funds and ETFs. Bond funds may be appealing (for those who want to hold bonds) because I can add them to my portfolio easily, starting at about $100 for the price of one bond ETF share.
Robo-advisors like Betterment generally include bonds in the managed portfolios they design and manage for individual investors.
The allocation of bonds to my overall portfolio may vary based on factors such as time horizon (when I'll need to liquidate some or all of your holdings to spend on living expenses, a major purchase, etc.) and risk tolerance (how much stability I want in my portfolio). In some cases, I can manually adjust the bond weightings.
Since I've been investing for a while, I have bonds embedded in my portfolio — including target-date funds in a 401(k) plan and managed investment portfolios that include bonds. But I can also buy bonds and bond funds as part of a portfolio I build myself through online sources such as TreasuryDirect or my brokerage firm.
How do you buy bonds?