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Bond Investing For Dummies, 2nd Edition

ISBN: 978-1-118-27443-9
360 pages
August 2012
Bond Investing For Dummies, 2nd Edition (1118274431) cover image
Your friendly guide to trading the bond and bond fund market

Bonds and bond funds are among the safest and most reliable investments you can make to ensure an ample and dependable retirement income—if you do it right! Bond Investing For Dummies helps you do just that, with clear explanations of everything you need to know to build a diversified bond portfolio that will be there when you need it no matter what happens in the stock market.

This plain-English guide clearly explains the pros and cons of investing in bonds, how they differ from stocks, and the best (and worst!) ways to select and purchase bonds for your needs. You'll get up to speed on the different bond varieties and see how to get the best prices when you sell.

  • Covers the ups and downs of today's market, which reinforces the importance of bonds in a portfolio
  • Explains how a radical fall in interest rates make bond investing trickier than ever
  • Explores the historic downgrade of U.S. Treasuries and its possible effects on government bonds

If you're an investor looking for a resource that helps you understand, evaluate, and incorporate bonds into your portfolio, Bond Investing For Dummies has you covered.

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Introduction 1

Part I: Bond Appetit! 9

Chapter 1: So You Want to Be a Bondholder 11

Chapter 2: Developing Your Investment Game Plan 23

Chapter 3: The (Often, But Not Always) Heroic History of Bonds 35

Chapter 4: Sweet Interest Is the Name of the Game 49

Part II: Numerous and Varied Ways to Make

Money in Bonds 71

Chapter 5: “Risk-Free” Investing: U.S. Treasury Bonds  73

Chapter 6: Industrial Returns: Corporate Bonds  91

Chapter 7: Lots of Protection (and Just a Touch of Confusion): Agency Bonds 105

Chapter 8: (Almost) Tax-Free Havens: Municipal Bonds  117

Chapter 9: Le Bond du Jour: Global Bonds and Other Seemingly Exotic Offerings 131

Part III: Customizing and Optimizing Your Bond Portfolio 149

Chapter 10: Risk, Return, and Realistic Expectations  151

Chapter 11: The Science (and Pseudoscience) of Portfolio-Building 169

Chapter 12: Dividing Up the Pie: What Percentage Should Be in Bonds? 179

Chapter 13: Which Kinds of Bonds Make the Most Sense for You? 197

Part IV: Bonds Away! Navigating the Fixed-Income Marketplace 211

Chapter 14: Strategizing Your Bond Buys and Sells 213

Chapter 15: Investing (Carefully!) in Individual Bonds .229

Chapter 16: Picking a Bond Fund That Will Serve You for Life .245

Part V: Bonds As Replacements for the Old Paycheck... 271

Chapter 17: Fulfi lling the Need for Steady, Ready, Heady Cash 273

Chapter 18: Finding Comfort and Security in Old Age    291

Part VI: The Part of Tens  303

Chapter 19: Ten Most Common Misconceptions about Bonds 305

Chapter 20: Ten Mistakes That Most Bond Investors Make 311

Chapter 21: Ten Q & A’s with Bond Guru Dan Fuss 317

Appendix: Helpful Web Resources for Successful Bond Investing 321

Index 325

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Russell Wild, MBA, is the author or coauthor of many nonfiction books, including Exchange-Traded Funds For Dummies, Index Investing For Dummies, and One Year to an Organized Financial Life. He is a NAPFA-certified financial advisor, registered with the Pennsylvania Securities Commission.

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September 25, 2012
Navigate the Bond Fund Market and Choose Wisely

Adapted excerpt from Bond Investing For Dummies®, 2nd Edition:

Get-rich-quick schemes and the people who attempt to try them are nothing new. But the truth is that those who make the most money in the world of investments possess an extremely rare commondity in today's world -- patience. At the same time that they're looking for handsome returns, they are also looking to protect what they have. Why? Because a loss of 75 percent in an investment (think tech stocks from 2000-2002) requires you to earn 400 percent to get back to where you started. Good luck getting there!

Garnering handsome returns and protecting against loss go hand in hand. But only the first half of the equation--the handsome return part-- gets the lion's share of the ink. Heck, there must be 1,255 books on getting rich quick for every one book on limiting risk and growing wealth slowly but surely.

So just what are bonds? A bong is basically an IOU. You lend your money to Uncle Sam, to General Electric, to Procter & Gamble, to the city in which you live -- to whatever entity issues the bonds -- and that entity promises to pay you a certain rate of interest for borrowing your money. This is very different from stock investing, where you purchase shares in a company, become an alleged partial owner of that company, and then start to hope that the company turns a profit and the CEO doesn't pocket it all.

Stocks and bonds complement each other like PB&J. Bonds are the peanut butter that can keep your jelly from dripping to the floor. They are the life rafts that can keep you portfolio afloat when the investment seas get choppy. Yes, bonds are also very handy as a source of steady income, but, contrary to popular myth, that should not be their major role in most portfolios.

Bonds are the sweethearts that may have saved your grandparents from selling apples on the street during the hungry 1930s (we're not talking about high-yield "junk" bonds here). They are the babies that may have saved your 401 (k) from devastation during the three growly bear-market years on Wall Street that started this century. In 2008, high-quality bonds were just about the only investment you could have made that wound up in the black at a time when world markets frighteningly resembled the Red Sea. And in 2011, when stocks went just about nowhere during the course of the year, bondholders of nearly all kinds were richly rewarded. Bonds belong in nearly every portfolio. Whether or not they belong in your portfolio is a question that Bond Investing For Dummies® will help you to answer.

Because this book is the all-new and thoroughly updated second edition, it also fills you in on some very important goings-on in the bond world over the past half-decade. Notably, the stock market collapse of 2008 and the "rush to safety" that made bonds, especially U.S. Treasury bonds, the belle of the ball. It also discusses the total collapse of the municipal bond market (the total collapse that Steve Kroft announced ahead of time on 60 Minutes in December 2010) and the much-ballyhooed Standard & Poor's downgrading of the U.S. government in mid-2011 and the bizarre advance in Treasury bond prices in the months that followed.

Since the first edition, the number and types of bond funds in which investors can now sink their money has virtually exploded...for better or worse. Many of these new funds (mostly exchange-traded funds) are offering investors slices of the bond market, often packaged in a way that makes bond investing trickier than ever. Perhaps the biggest change in the six years since the first edition of this book was published is this: interest payments--the main reason that bonds exist--have plummeted to historic lows. Never in our lifetimes--or our parents' lifetimes--have we seen the negative "real returns" (after-inflation returns) that some bonds have been offering.

Questions to Ask Yourself:

  • What's my split gonna be? (Diversify wisely!)
  • Exactly what kind of bonds do I want? (Treasrury, corporate, agency, or municipal bonds? Long-term or short-term bonds? Domestic or International?)
  • Where do I shop for bonds?
  • What kind of returns can I expect from bonds, and what is my risk of loss?

And don't forget to check out the Cheat Sheet on Dummies.com!

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