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How and Why to Invest in Bonds: A Morningstar View

This series of articles will tackle the basics of bond investing.

Many investors feel they should have bonds somewhere in their portfolios. But most don't know how to address their fundamental questions about how to do so. How much of their portfolios should be invested in bonds? Individual bonds or bond funds? What mix of different kinds of bonds is best over time?

In early 2019, Morningstar conducted a series of forums with people interested in bond investing and found that, from the get-go, bond investing can be confusing for many individual investors. Confusion often starts with the fact that bad economic news is generally good news for bond prices and vice versa. In other words, if greed makes stocks go up and fear makes them go down, it is the opposite for bond prices.

Rising bond prices also mean lower yields (and vice versa!). So, in a time of crisis, investors are willing to pay more, and accept a lower yield, in exchange for the relative safety of bonds. And yet, for an investor looking to invest in a bond fund for income, it can be good news when bond prices are falling and yields are rising. Also confusing? High-yield corporate-bond funds may act more like stock funds than government-bond funds.

But a smart allocation to bonds can make the difference between a portfolio with scary ups and downs that spook long-term investors out of the stock market, leaving a retiree short on the money needed to pay bills, and a more stable and diversified portfolio that can deliver the outcome an investor needs to pay expenses.

For this report, we’ve turned to a wide range of Morningstar's experts, from our veteran personal finance columnists to our investment management team. For beginner investors, we've explained the basics of bond investing step by step, in plain English. But more experienced investors will also find valuable insights on building bond portfolios based on Morningstar's independent research and commentary.

  • What role do bonds play in a portfolio?
  • How much of a portfolio belongs in bonds?
  • How do you know if the bond market is cheap or expensive? Does it matter? Where are we now?
  • What factors should be considered when deciding among different kinds of bond investments?
  • What strategies make the most sense in different market and economic environments, such as rising inflation and bond yields?

A Very Short Primer on Bond Terminology There are two main terms that will come up again and again with bonds: duration and credit quality.

For a bond market pro, duration can be a complex variable. For most everyone else, it is easiest to think of duration as a bond’s maturity. Bond investments are generally broken into three segments: short--less than two years, intermediate--two through 10 years, and long-term--bonds maturing in more than 10 years. In general, long-term bonds are more prone to wider swings in price than short-term bonds.

Credit quality boils down to the ability of the bond issuer to make good on interest payments. Government bonds are generally the highest quality because governments, including municipalities, can use taxes to generate revenue to pay off debt, while a corporation's ability to pay debt depends on its business prospects.

Continue with the report here:

Part 2: What Role Do Bonds Play in a Portfolio? Part 3: Bonds Vs. Bond Funds Part 4: To Index Bonds or Not? Part 5: How Much of a Portfolio Should Be Invested in Bonds? Part 6: What Kinds of Bonds Should I Hold? Part 7: Bonds: Where Are We Now? Part 8: How Should Bond Investors Position for What Comes Next?

The following authors contributed to this series: Tom Lauricella, Editorial Director, Professional Audiences Christine Benz, Director of Personal Finance Sarah Bush, Director, Fixed-Income Strategies Jeff Westergaard, Director, Fixed-Income Data

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About the Authors

Tom Lauricella

Editorial Director, Markets
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Tom Lauricella is chief markets editor for Morningstar.

Lauricella joined Morningstar in 2015 after a long career at The Wall Street Journal and Dow Jones. During his time as a reporter and editor, he covered a wide array of investing topics, including mutual funds, retirement planning, and global financial markets. While at the Journal, he won the prestigious Gerald Loeb award for his role in covering the May 2010 stock market “Flash Crash.”

Lauricella holds a bachelor’s degree from New York University, where he majored in journalism.

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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