It’s been an exciting year thus far in 2022. Yes, the market is in full retreat, and we are moving into a downturn and recession. However, this opens up new possibilities for our investment portfolios.
With the rise in interest rates comes a chance to obtain high-quality bonds at great prices. Bonds haven’t been this attractive since the Great Financial Crisis in 2008.
Let’s take a quick look at how interest rates affect stocks and housing; then, we can review some of the types of bonds for our portfolio.
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Stocks vs. interest rates. As interest rates rise, stocks usually fall because they compete for your money. Individual stocks offer more risk and reward than bonds, which is why the two move in opposite directions.
As I covered in “Debt vs. Equity,” bonds are debt you lend to the government or a company. Stocks are a form of equity. With bonds, you don’t participate in any profit-sharing from the company (dividends); the company pays back its loan to you.
However, if a company fails, bondholders are higher on the repayment chart than equity holders. This makes bonds much safer than stocks, meaning they pay you less for your investment.
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You always have to ask yourself one question: where can I get the safest 4% yield? When interest rates on treasuries are 1.5%, that 6% yielding dividend-paying stock looks mighty tasty.
However, when the 10-year Treasury is at 4.5%, why would I want to risk my cash with a dividend-paying stock? This competition is how the bond and stock markets compete for your money.
Mortgage rates vs. interest rates. Mortgage rates usually travel higher than the 10-year Treasury. As we see now, the 10-Year Treasury is hovering around 4.5%, and 30-Year mortgage rates are near 7.1%.
They move together because banks bundle mortgages to sell mortgage-backed securities like bonds. MBS have a slightly higher risk profile because homeowners can default.
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As interest rates rise, companies that hold MBS get pounded (Mortgage REITs). If they have hundreds of mortgages with a yield of 2% and rates rise to 7%, the value of their holdings drops significantly.
If you believe the market will recover, it could be an excellent time to purchase mortgage REITs (or REITs in general).
Time to buy bonds. I wanted to give you some context before I start screaming to purchase bonds. Understanding how interest rates affect all investments will help you make great long-term decisions.
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I am a buy-and-hold bond, housing, and stock investor; I don’t plan on selling anything. Therefore, if I buy a 30-year Treasury at 4%, I intend to hold it forever.
I am a kid in a cookie store with bonds right now. Getting a risk-free 4% return is exciting to me. You may be different. You can buy 4% bonds intending to sell at a profit when rates move down to 2%.
It may take ten years to see a zero-rate environment again, but if it happens, you can make great money. Understanding your risk profile and investing strategy is vital before you buy any investment.
I love 30-year bonds. I love 30-year bonds the most because I am holding on for life. If you are a bond trader, 30-year bonds carry the most duration risk against their interest rates.
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I recently bought my first 30-year bond for the first time in two years. I am purchasing at least $200/month in 30-Year treasuries with the intent to increase this amount soon.
More bonds, the merrier. However, there are other ways to buy bonds. I also purchase 30-Year bonds inside an electronic traded fund called Vanguard Long Term Bond Fund (BLV). Bond funds are a great way to gain exposure to bonds without buying individual securities.
You also have bond funds for high-yield bonds (JNK) and municipal bonds (NVG). All of these funds have excellent yields at the moment.
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It is crucial to point out that these funds trade on the stock market, which can sometimes be emotional or irrational. Holding a bond fund is not like owning a bond.
You can also invest in baby bonds, which are similar to preferred shares, except they pay interest, not dividends. Baby bonds usually have a par value of $25, and you can get higher yields if you spend less than $25 on them.
I am a massive fan of baby bonds and preferred shares as a way to buy fixed income on the stock market. Once you find a few good baby bonds, you can build a nice income portfolio around them.
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Finally, you can buy bond funds within a closed-end fund. My favorite bond funds come from PIMCO, and they are (PDI) (PTY) and (PDO). I purchase these funds monthly in my high-income portfolio.
Long-term bond investing. Diversifying your bond holding on and off the stock market is vital. Buying treasuries and “I” bonds are the best way to avoid keeping all of your holdings on the stock market.
It’s similar to investing in gold and silver. You want to hold some physical gold and silver on hand for the zombie apocalypse, but you can also invest in gold and silver funds.
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“I” bonds don’t produce income but create compounding interest for your portfolio. Other treasures will buy you twice a year and help you create a fixed income that you can reinvest in for higher yields.
Conclusion. Now is the perfect time to lock in significant interest rates. If you attempt to time the bond market (say, waiting for 6% yields), you may be disappointed with your results.
I consider a 4% yield a good, low-risk way to grow my wealth. My true wealth generation comes from renting rooms and creating books.
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These two methods produce an infinite return, so I can invest in bonds indefinitely. Once you know how to create money, yield is much less critical.
However, if you work for money (at a job), you want to protect each dollar. Bonds are a great way to secure a low-risk return. You can then convert your interest payments into high-yield dividend payments via income investing.
Bond investing can be a lot of fun, especially reinvesting your interest payments. These topics may seem complex but keep reading, and you will slowly absorb the information.
It took me two years to understand how to trade options, but I completed my first covered call this week. If you don’t understand bond movements, stick with it, and you’ll gain knowledge and experience.
Interest rates, bonds, stocks, and mortgages all move in tandem or opposite directions. Understanding why will make you a great investor. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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