All About Bonds

Investing

This blog post is all about bonds. If you’d rather watch my YouTube video on the subject, here it is:

I was trying to decide how much of my investment portfolio should contain bonds. So I decided to do a bunch of research into bonds, and here’s what I found. Sorry this isn’t the video about my portfolio, like I promised last time, but I needed to do this research, so I thought I’d share it with you.

You know what a loan is, right? You lend a person money, and they pay you interest for a certain term of time if you’re lucky, and at the end of the loan, they give you back the principal. A bond is a legally binding form of such a loan between governments or corporations and you. You buy a bond, they pay you interest over the course of a number of years, and then at the end they give you your money back. The government or corporation wants to borrow some money, and they can do it from you!

There are two kinds of bonds – corporate bonds and government bonds. Government bonds can be federal, or municipal. Bonds from lower levels of government are riskier than federal bonds because those levels of government can default on their loans and can’t just print money to pay their debts. US Treasuries are bonds from the federal government. 

Not only can municipal governments default on their loans, but corporations can also get into trouble and not be able to pay you back. Buying a bond from a stable and profitable company is a much safer investment than buying from a fly-by-night startup. So bonds have different ratings.

There are companies out there that rate bonds. In the US there are three primary bond rating agencies: Standard & Poor’s Global Ratings, Moody’s, and Fitch Ratings. Each has their own rating system, but they’re similar. For example, Standard & Poor and Fitch both rate their bonds AAA, AA, A, BBB, BB, B, CCC, CC, C, and D. The best is an AAA rating. Safer bonds generally have lower interest rates than riskier bonds. You want investment grade bonds, which are the ones that are less risky – BBB and up. And you want to stay away from high yield or junk bonds – the ones with really poor ratings – BB and lower.

Primary issue bonds are ones you buy directly from the issuer through a broker or directly from the government. Secondary issue bonds are those that you buy from someone who already owns the bond.

Investment grade bonds are a lot safer than buying a stock. For this reason, people like putting bonds in their portfolio to both add diversity and safety.

It’s possible to buy bonds that have already been issued. But it’s unlikely that you’ll buy it at face value. Here’s why. Say a 10 year bond was issued with a 5% yield or interest rate. But the next day, interest rates go down to 1%. New bonds would have to be issued at the 1% rate. So now that 5% bond looks really good, doesn’t it? If you had to choose between the 1% bond and the 5% bond, you’d choose the 5% bond. So the person selling it to you can up the price a little, and as long as they don’t raise it TOO much, you’d still be willing to pay.

But buying bonds directly is safe – especially if you buy US Treasury bonds. You get regular interest payments and principal returned at maturity.

If you want to buy individual bonds you have to buy them from the government or over the counter from a bond broker. A bond broker is someone who deals with buying and selling bonds.

Benefits of bonds:

  1. Less risky than stocks.
  2. Diversification – not just stocks.
  3. Income from interest.

Bad about bonds:

  1. Lower returns than stocks.

But say you don’t want to buy individual bonds, and don’t want to wait years for them to mature, only to buy more bonds, etc. Also, you want more diversity in your bonds.

This is where a bond fund comes in. You can buy a basket full of bonds, either in a bond mutual fund or a bond ETF. I don’t like mutual funds, so we’ll just talk about ETF’s here, but the concepts are the same.

A bond ETF is a basket of a bunch bonds. This provides diversification. If one of the bonds goes into default, it’s just one of many many bonds in the fund, and will have minimal impact. And you can buy shares in that ETF on the stock market, which is very easy to do. Just contact your broker and ask them to do it, or do it through your broker’s website or using your brokerage account app on your phone. Bonds usually have denominations of $1000 or $5000 or more, but shares in an ETF usually cost much less than that, so it’s also easier to get started. You don’t need to buy individual bonds yourself – the ETF people do.

The owners of the bond ETF will constantly be cashing in bonds as they mature and will buy new bonds. They will also typically pay you a dividend, which comes from interest from bond payments or from selling of bonds themselves. While a bond ETF is not guaranteed to give you a dividend, it’s still very likely. Check the ETF’s payment history online to see what their payments are like. Another risk with bond funds is that they do not guarantee the return of principal. If you buy a US Treasury bond, the government will guarantee you your interest payments and return of principal when the bond comes due. A bond fund, however, may go up and down in price, and when you decide to sell, the price may be lower than at the time you bought it.

Bond etfs are more liquid than buying or selling bonds directly with dealers. Just go to your broker and buy and sell at will.

So, now you know about bonds.

What I’m personally trying to determine right now is how to rearrange my portfolio to follow a real strategy. Up until now, I’ve just tried purchasing funds that looked attractive. But I want to start following a strategy.

So that means I need to come up with a strategy, which partially means determining how much of my portfolio will be in bonds. I haven’t come up with an answer yet.

In case you want a place to start, here are the names of some bond funds that I know of. But it’s just a small list to get you started:

iShares Core U.S. Aggregate Bond ETF (AGG)

BMO Long Corporate Bond Index ETF (ZLC.TO)

Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

Don’t Buy Stocks! Except …

Investing

This blog post is about buying individual stocks. If you’d rather watch the video instead, here it is:

I made two purchases recently and I thought they were rather interesting. One was some stock, and the other purchase was a fridge. I put a whole lot of thought into the fridge – a lot of research and measuring and making sure I had the right fridge type and the right make. (An LG with french doors.) As to the stock I bought, well I thought it’d be cool to get into this bitcoin thing so I bought a company – HIVE – that makes bitcoins.

Now which do you think I put more research into? The fridge or the stock purchase? Well, the answer is the fridge! I recently gave some stock buying tips and I didn’t even use any of them for making this decision! It was a spur of the moment kind of thing. And I think that’s a problem – I think lots of people when they buy stocks, they don’t put as much thought into it. Stocks appreciate in value and do you well in the future, to be counted on in retirement. But sometimes we give more though to purchases that last just a few years versus purchases that should help you retire!

I’ll tell you later why I think it might have been okay in this case. But in general maybe I should have learned even more about HIVE before buying in. Like using some of those stock buying tips I recently researched. And there’s a whole lot more to it than that as well. For what it’s worth, I am not a financial advisor so I have to tell you that you need to do your own research and don’t just be trusting me. I’m trying my best, but I’m not expert.

Anyway, say you become an expert: you go to financial school for years, you watch videos, you study books, you learn from mentors. You’re an expert in the field finance and the stock market. Now that you’re an expert, what’s you’re track record going to be like? Hopefully the stock portfolio you put together will beat the market because if it doesn’t, you might as well just buy a market ETF instead – no need to buy stocks yourself. (An ETF is a portfolio of other stocks or funds that usually tracks some kind of index, like the S&P 500.) So all these people that are out there that are experts in the field of buying stock – how well do they do? Well it’s been shown, and you can do research online, that even the experts over the long term don’t beat the market. Over 80% of experts couldn’t beat the market over the long term. Actually there’s a great video on YouTube by Ben Felix about why it’s so hard to beat the market – I highly recommend you look it up. It’s called “Why it’s So Hard to Beat the Market.”

If it’s so hard to beat the market, the question then becomes why do you think that you can beat the market? Because I bought that HIVE stock a little while ago and somebody actually sold it to me. That means that they didn’t want the stock that I did want. So what makes me smarter than that guy? Anytime you do any purchase you can ask yourself: what do you know that the guy who’s selling it doesn’t? So you have to wonder if it’s really worth buying individual stocks. Should I buy individual stocks in my portfolio? The short answer for me is “no”. If you want your portfolio to do well – to beat the market – you’re playing a loser’s game.

Don’t take my word for it. But first, you need to know what and ETF is. An ETF is an exchange traded fund – it’s just a basket of stocks, bonds, or other ETFs and you can buy on the stock market. An typically tracks the an index of some kind. The most popular ones track the S&P 500, or the whole market, or some other big index like the Nasdaq. Now that you know this, here is a quote by Warren Buffett – a pretty famous investor who’s done really well for himself. He says a “low cost index fund is the most sensible equity investment for the great majority of investors.” Another well-regarded investor is Peter Lynch, and he says that “most investors would be better off in an index fund.”

So the question is: should you buy ETF’s or should you be buying stocks? I think that for my retirement an index fund is the way to go. Actually, I am buying more than one index fund in order to diversify. Three to seven index funds, or four to six, depending on who you listen to. I’m trying to figure out the best set of index funds to buy. I already own lots of ETFs but I’m thinking about paring it down because I made decisions that might not have been optimal, so to speak. So I will also be selling some of my stocks. I already sold recently to buy ETFs with. And I’m deciding which ETFs I should buy.

I decided I am not going to buy large amounts of stock anymore. I’m only gonna buy small amounts of stock. A while ago I bought Tesla (TSLA) because my son he really likes Tesla cars. So now we can say that we own a part of Tesla. And guys how many shares I bought? One! 😛 (It has since split). It was a fun purchase, but because I don’t have a crystal ball I decided one share was enough. I also bought a few shares of Shopify, a great Canadian company, because they’re a local firm and a friend of mine started working there. Coincidentally they’re doing really well too. One of my biggest individual stock purchases was AT&T. Some guy on the internet was suggesting them, and he seemed to really know his stuff, so I bought some AT&T stock. Right now it’s down 30%. So yeah… there’s that. That taught me the lessons of a) don’t trust random dudes on the internet – do your own research. And b) individual stocks are always a gamble. One guy on my TikTok channel said speculative investments shouldn’t be more than 1% of your portfolio. Makes good sense to me.