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

Alright, let's dive into the world of bonds, shall we? Today, we're breaking down why these bad boys are often touted as the safe bet in investing. Understanding Bonds: The “Safe Bet” in Your Portfolio? But what does that really mean? We’re gonna explore the ins and outs of bonds, from government to corporate, and why they can be a solid part of your financial game plan. Trust me, understanding bonds is key to leveling up your portfolio and making smart investment moves. So, buckle up, grab your favorite snack, and let’s get this financial ride started!

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Bonds are often hailed as the go-to safe bet in the world of investments, but what does that really mean? In today’s chat, we dive headfirst into the world of bonds, peeling back the layers to reveal what they are, how they work, and the risks that come with them. You might think of bonds as those boring old investments that your uncle talks about at family gatherings, but let me tell you, they have their place in your financial arsenal. We break it down simply: when you buy a bond, you’re basically lending your cash to someone—could be a government, a city, or a company—and they promise to pay you back with interest. Pretty straightforward, right?

But here’s the kicker: not all bonds are created equal. We dig into the differences between government bonds, corporate bonds, and municipal bonds. Government bonds are often seen as the safest option—backed by the U.S. government, they’re your safest bet. However, with safety usually comes lower returns. On the flip side, corporate bonds can offer higher returns because they come with higher risk. We even share a relatable story about lending cash to a kid for gas money, which helps paint a clear picture of how bonds operate in the real world.

As we explore why bonds are considered a safe investment, we also discuss the risks involved, like inflation and the rare but real possibility of default. It’s all about finding that balance in your portfolio, especially as you near retirement. Bonds might not be the thrilling growth engine that stocks can be, but they play a crucial role in stabilizing your investments. So, whether you’re a newbie or a seasoned pro, understanding bonds is essential for being financially savvy. And don’t worry, we wrap it all up with a little scriptural wisdom to keep you grounded as you navigate your financial journey.

So grab your favorite drink, kick back, and let’s break down bonds together!

Takeaways:

• Bonds are basically loans where you lend your cash and earn interest on it, simple as pie!
• It's crucial to know that not all bonds are created equal – government bonds are low risk, but corporate bonds can be a wild ride.
• Inflation is the sneaky villain in the bond world, making your fixed interest payments worth less over time.
• Bonds are great for balancing your portfolio, especially when retirement is creeping up on you like a ninja.
• Don't forget, investing in bonds isn't about making a quick buck, it's more of a stabilizing act for your finances.
• Always do your homework on bonds so you can make informed choices and pray for guidance on your investments.

Links referenced in this episode:

• financiallyconfidentchristian.com
• financiallyconfidentchristian.com/becoming

Episode Transcript

(00:00):
I got this email and I said,you know what, this is a great way
to frame this question. Here'sthe email, Ralph. People keep saying
bonds are the safe bet. Whatdoes that really mean? Are they guaranteed
or do they come with their ownrisks? 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 youto fully understand them. I want

(00:24):
you to understand why peopleuse them and, and how they fit into
your financial life. Becauseit's so important that you understand
the basics of this becausethese are a great thing to use as
a balanced part of yourportfolio. Let's get to it. On today's
show, this is FinanciallyConfident Christian, your daily dose
of gospel, grounded insightand faith driven tips to help you

(00:46):
break the cycle of financialshame with confidence. Hello and
welcome back to FinanciallyConfident Christian. And I am so
happy that you've chose togive me just a little bit of your
time. My passions in life isto really give back to people. I've
spent 30 years doing financialwork. I've spent 30 years working
with small business clientsand individuals. And I bet you're

(01:06):
probably one of those peopleas well. You've tuned into the show,
you're thinking, oh, thislooks pretty interesting. Financially
Confident Christian. Yes, Iwant to be a financially confident
Christian. But I'm Ralph andI'm here to help you break that cycle
of financial shame that somany people find themselves in. I
found myself in that so manytimes. And if you missed yesterday's
show, I had a greatdiscussion. We talked about stocks.
And one of the things that Ilove to talk about is how to break

(01:29):
things down in just simpleEnglish. And what we agreed to yesterday
was stock is nothing more thanownership in a company. But I really
stressed yesterday how theymatter for long term growth. So if
you missed yesterday's show,here's the great part. You can go
find all of our shows atfinanciallyconfidentchristian.com but
today, like I said, we'regoing to talk about bonds. And a

(01:50):
lot of people say, rob, I haveno idea what bonds are. A lot of
people say, hey, these arereally safe investments. But I want
you to know some things thatyou should understand before you
choose to use them. I rememberone thing. Here's a great way to
explain this. Somebody said tome the other day, Ralph, can't you
explain these bonds to me? Ijust don't get it. And I thought
back to when my son firststarted driving, hey, if you have

(02:12):
teenage children or maybethey're out of the nest like mine
are now. But I remember hecame to me one day. He said, dad,
I need 20 bucks for gas. Hesaid, my paycheck's gonna be coming
in on Friday, and I promiseyou I'll pay you back, even give
you a couple bucks ofinterest. And so you know what? I'm
a good dad. I gave him the 20bucks. I said, hey, enjoy. Go fill
up your tank with gas. Andwhen his paycheck came in, he absolutely

(02:34):
gave me back that 20 bucks. Healso 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 takeyour five bucks. That's not cool.
But that's really how bondswork. Bonds work the same way as
an investment. Basically, whatyou're doing is you're lending somebody
money. Could be a government,could be a city. You see a lot of

(02:55):
these, what they callmunicipal bonds or government bonds
could be a company, individualcompany, and they agree to pay you
back later. And while you havethat loan, that's basically what
it is. While they have thatloan, they give you interest. It's
really that simple. What doyou think? Not that complicated,
is it? But now let's talkabout what bonds are in a little
bit more detail. Like I said,a bond is simply a loan. You're the

(03:19):
lender. So think about it likethis. You become the lender. You're
kind of like the bank, if youwill, and the borrower promises to
repay you. They're not goingto just pay you back what you gave
them, but they're going togive you some interest as well. Now,
generally, there are twodirect types of bonds. There's government
bonds and there's corporatebonds. Government bonds, or you've
heard this term U.S. treasurybonds. Those usually carry the lowest

(03:43):
risk because they're backed onthe full faith and credit of the
United States government. Now,we could have a discussion about
whether the US Government is agood entity to invest in or not,
but that's not for today'sepisode. But because they have low
risk, as we talked about theother day, when things have low risk,
they generally have a lowreturn as well. So that's what we're

(04:04):
talking about. We saygovernment bonds. Now, the other
side of that is what's calledcorporate bonds. These are bonds
that are owed by individualcompanies. Now, because they're not
backed by the full faith andcredit of the United States government
or another entity, maybe acity or state, they have a Higher
risk. But with that higherrisk comes a higher reward. Now,

(04:25):
municipal bonds, these areoffered by states or cities. And
the benefit to thosegenerally. Are there tax advantages?
One of the hats I wear on adaily basis is a tax hat, a tax advisor
hat. So there are some taxadvantages to municipal bonds. So
there's really three types ofbonds. There's the government bonds,
the corporate bonds, andmunicipal bonds. Now, one of the

(04:47):
things you asked in yourquestion today, which I think was
so important to understand,why do people call these safe? There's
a couple reasons for that. Thefirst reason that people call them
safe is their predictableinterest payments. When they issue
this bond, they put a letter,they put a document that says, I
guarantee I'm going to pay youX number of dollars per interest

(05:08):
at these particular intervals.And because it's a loan, you don't
own a percentage of thecompany. Like that stock we talked
about yesterday. If you missedyesterday's show, we talked about
a pizza. And when you buy apiece of pizza, you're buying a piece
of that piece. Well, with abond, you're not buying any stock
ownership, you're just givingthem a loan. So by that very nature,

(05:29):
they're less volatile thanstocks because they've got a commitment
to you that they've got to payyou back. Now you might be saying,
Ralph, okay, well, where dopeople use these? People generally
use these to balance yourportfolio. So if you work with an
investment advisor, if youwork with a broker, a lot of people
call them brokers. If you workwith a broker, they're going to use

(05:49):
these to help balance yourportfolio. Because that's the idea.
We want to make sure thatwe're balancing some high risk and
some medium risk and some lowrisk thing. But let's talk about
those real risk, because thereare risks. You might be sitting here,
Ralph. You know, there's gotto be some risk to this. Of course
there is. One of the big riskto bonds is inflation. Let me explain
that a little bit. We've beenthrough some really tough times with

(06:12):
inflation lately, haven't we?Well, inflation works like this.
When you buy a bond, that bondhas an interest rate on it. Well,
that interest rate is set atthe time the bond is sold. So if
six months down the road,interest rates go up, guess what?
That bond is still paying youat that lower rate. So what happens
in the market? There's asecondary market for these bonds.

(06:33):
I don't want to get lost inthe detail today, but there's a secondary
market for these bonds. Sowhen interest rates are rising, that
bond becomes less valuable. Soif you wanted to sell that bond before
the end of the investment'sover, you're going to get a lower
price for that. So there issome risk in that. But in general,

(06:54):
the risk only comes from thatinflation. Risk default is rare,
but there are times when bondsare defaulted on. I've seen it happen
with municipalities. You mayhave seen this in the news. The city
went bankrupt, thismunicipality went bankrupt. So you
can lose your money, you know,if you loan your friend money and
your friend declaresbankruptcy, guess what? You've lost

(07:14):
your money. It works the sameway with bonds. So now you might
be asking, Ralph, okay, wheredo they fit into a portfolio? I love
to use bonds when retirementis approaching because we've got
to start putting that moneyinto buckets where we know there's
going to be sureness in thatwe don't want to be investing all
our money in the market wherethere could be volatility, there

(07:35):
could be something could bearound the bend we're not expecting.
So that's where these bondsreally come into place. Because in
the traditional stock marketinvestments, there are all kinds
of wild swings. Hey, open upthe newspaper, turn on the market
watch or whatever you watch ontv, you'll see that market is going
up and down like a seesaw. Sothat's where a great time to use

(07:55):
bonds. They're not a growthengine. That's the thing I need you
to understand right now. It'snot about, well, I'm going to put
a lot of money into bonds sothey'll grow, but what they are is
really a stabilizer for yourportfolio. Now, one of the things
I do on this show is I alwayswant to tie what I'm talking about
back in the scripture. Youmight be saying, Ralph, okay, you're
going to really stretch forthis one, dude, because where are

(08:16):
you going to find a Bibleverse about bonds? Well, it's not
quite about bonds, but I foundthis one from Ecclesiastes, chapter
11, verse 1. You might noticeI've used this one many times as
we go through this investmentseries, because it really nails what
we're talking about. Again,this is Ecclesiastes chapter 11,
verse 2. Invest in sevenventures. Yes. In eight. You do not

(08:38):
know what disaster may comeupon the land. And if you think about
it, bonds can be one of thoseventures. You may be investing in
stock, you may be investing inbonds. 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 clientsthat have come in to meet with me.
Think about this for a second.They had all their money in a particular

(08:58):
company stock and that stockwas doing great. The company's doing
fantastic. But think aboutExxon. Date myself a little bit.
There was a crash up in Alaskamany, many years ago by Exxon. Well,
guess what happened? Exxonstock 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 wherethese diversification really helps.

(09:22):
Got one more Bible verse, andthat's Proverbs chapter 21:5. And
this is all about plans of thediligent, the plans that are diligently
to profit as surely as hasteleads to poverty. And see, that's
where bonds reward patienceand are also part of a careful planning
thing. So I always want togive you an action item here on the
show. What are some thingsthat you can do to better understand

(09:43):
bonds? So here's your homeworkfor today. If you choose to do this,
you're like, Ralph, I came towatch your show. I came to listen
to your show. I wasn'texpecting 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 rightnow. See God, I'm leaning on bonds
for safety, or am I leaning onGod for just complete security? Because

(10:06):
that's what we really need todecide. Bonds are a good investment
choice, but are we relying onthat or relying on God? Let's pray
together right now. HeavenlyFather, we just thank You for teaching
us that real security comesonly from You. So we just ask right
now, Lord, that You would helpus be patient. Help us be wise, Lord,
and guide us as we use moneyin ways that honor You. And we ask

(10:27):
this in confidence in the nameof Jesus. Amen. I want to ask you
for a favor right now. Iftoday's episode has helped you see
bonds more clearly, can I askyou to do me a favor to share it
with somebody else who's justnow learning about money, the things
that we do a bad job in thiscountry, truly, I think is is sharing
financial information andreally sharing how finances work.

(10:49):
And you can just send them alink to the show to send them to
our website. That'sfinanciallyconfidentchristian.com and
remember, if you've got aquestion for the show, I would love
to answer it. I love answeringquestions. That's what really fuels
my day, to be honest with you.So if you've got a question, maybe
you're sitting there rightnow, you're like, Ralph, I got a
question for you. Simple thingyou can do. Just go to justaskralph.com
you put your name, your emailaddress and put your question in

(11:11):
there. And guess what? I'llanswer it on the show. And while
you're there, I'd love to giveyou a free copy of my book. One of
the things that I love to dois write. I love to give back to
people because I truly believethat when we study and we learn more
things, we can become thosefinancially confident Christians.
And I want to give you a copyof my book. I just finished writing
my third book. It's called Howto Become a Financially Confident

(11:33):
Christian and it's absolutelyfree. You can just go to this website,
financiallyconfidentchristian.com/becoming that
to you one more time because Idon't want you to miss it. That's
financiallyconfidentchristian.com/becoming now.
Today we learned about bondsand how they're steady and predictable
tools. They're not perfect. Ihope you get that from today. And
they're not risk free, buttomorrow we're going to dive into

(11:56):
mutual funds. A lot of peopleask me about this because they're
so popular right now andthey're a great investment for beginners.
So make sure you join metomorrow on the show when we talk
about mutual funds. I justwant to encourage you right now.
You may start off todayshowing I don't know anything about
bonds, but I truly believe youcan do this. You really can. And
together we can break thatcycle of financial shame and we can

(12:18):
do it with confidence. So as Ialways in the show, stay financially
savvy out there. I hope to seeagain tomorrow and God bless you.
Have a great day.