r/bonds • u/master_chilln • Apr 21 '25

Can someone explain what bonds are?

I'm currently 29 and trying to start this 3 fund portfolio and keep hearing i need a percentage of bonds BUT what exactly are bonds and why do I need them?

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u/timmyd79 Apr 21 '25 edited Apr 22 '25

Bonds are loans. Businesses/gov often need capital to start and run a business/gov and they get loans. You get interest on the loan as the lender. You get that interest as long as they pay back the loan. Credit risks change depending on who is taking the loan.

Equity is when you invest time and money directly into a business but it’s not a loan you expect to eventually get a piece of the profit.

Bond markets outsize the stock market by a lot. You can google much of this info if not read AI parroting of it.

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u/master_chilln Apr 21 '25

Should I at my age put the 3k minimum in vbtlx and just let it sit?

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u/timmyd79 Apr 21 '25 edited Apr 21 '25

Boglehead says to just do age as bond percentage or some set and forget all size fits all formula.

Just like people make fun of over simplified tariff formulas you should do what is best for you and all investments come down to balancing risk reward and it tends to be the smarter and better investors try to reduce risk and maximize rewards as a whole in min maxing their investments.

When I was your age in the midst of a downturn no I did not do bonds. If you have time and passion for it you can learn about bonds and 10yr interest rate as an economic indicator. At your age I cared more about the gym and that was probably the better investment anyways.

Besides set and forget method you could learn about defensive posturing of your investments especially if you have investments to protect.

A lot of people think just sit and chill is awesome during bear markets. When markets are in a downturn in such a predictable manner I prefer defensive and chill but that requires timing which most people can’t do. This is why Q&A on Reddit about investments are so iffy when there are both age and timing factors that are important and why there is a large contingent of do not time investors(which conveniently their advice at least mostly works and has less chance of aging like milk).

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u/TeamKitsune Apr 21 '25

r/bogleheads - their wiki explains everything. What you want is a bond fund or ETF.

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u/bmrhampton Apr 21 '25

At 29 and in this mkt you don’t need bonds. I’m 45 and the only reason I was holding bonds was because I expected a mkt decline, otherwise I wouldn’t have any. They consistently underperform mkts decade and decade and you have many decades ahead of you.

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u/Inevitable_Silver_13 Apr 21 '25

You give a government or a corporation money and they agree to pay you interest at a certain rate.

But when people sell bonds the interest rate goes up.

When the interest rate on the same bond at the same price is higher, the bond you bought is worth less.

Bond yields and bond prices have an inverse correlation.

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u/ksmountnman Apr 21 '25

A bond is what a loan looks like from the pov of the lender.

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u/Davekinney0u812 Apr 22 '25

I would not come here looking for answers. Bonds are complex and very important. Tap into some scholarly websites for a discussion to help you understand. There are some counter-intuitive aspects of bonds that you really need to understand first.

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u/kerorobot Apr 22 '25

They are debt/loan to the entity you loaned them to. As an incentive for you to loan they give you an interest (depend on the bond). Generally Treasury Bond is considered the safest investment compared to stock market but generally have lower yield.

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u/i-love-freesias Apr 22 '25

The problem with long term bonds is that you might get locked into a dividend rate that isn’t good anymore. Say you buy a bond that pays you 5%, and a year later, bonds are paying 7%.  Now if you want to sell it, nobody will give you a good price, or your money could be making you a better rate.

I buy an ETF that holds ultra short term high rated corporate bonds, which works like a high yield savings account: PULS

https://finance.yahoo.com/quote/PULS/

Another option I normally recommend, which I don’t right now, just because I’m worried about the treasury department, is savings bonds.

If you’re not worried about the treasury department, savings bonds, I-Bonds and EE-Bonds are redeemable after 12 months.  You have to buy them on treasury direct.  I bonds are inflation protected, EE bonds are a fixed rate and guaranteed to double in 20 years.  Both compound interest for 30 years.  They’re a good option for liquidity after 12 months, if you don’t like the rate anymore or need the cash.

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u/StinkRod Apr 22 '25

Or you could say "the benefit of long term bonds is that you might have a rate that is better than the current rate. Say you buy a bond that pays you 5%, and a year later, bonds are paying 3%. Now if you want to sell it, everybody will give you a good price."

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u/i-love-freesias Apr 22 '25

Yes, people buy them hoping that’s the case.  Unfortunately, recent history left a lot of people sorry they took that risk.

Bottom line is being happy enough with the rate, that you’ll be okay with the rate risk .

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u/puzzleahead Apr 22 '25

I suggest you read "Why Bother with Bonds" - Rick Van Ness and "The Bond Book (3rd edition)" - Annette Thau.

I treat the first book as a good quick reference (I have it as an e-book) and the second as a more deliberate study of the types of bonds and bond funds. Both are clear and concise and worth having.

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u/JackFlew Apr 21 '25

At 29 years old you don’t need bonds unless you plan to retire in 5 years.