Are bonds worth investing in?
They can diversify your portfolio and tend to be a safer investment than stocks


While stocks may come to mind first when you think about investing, another major investment category is bonds. They can not only add diversification to an investment portfolio — an important ingredient in protecting against market volatility — but they also tend to be a safer investment than stocks. However, with bonds' lower level of risk comes a lesser potential for reward, and their risk is not non-zero.
Here is what you need to know about this major asset class to decide whether — and how — to include them in your investment portfolio.
How do bonds work?
A bond is a "loan to a company or government that pays investors a fixed rate of return," said NerdWallet. So while "the borrower uses the money to fund its operations," in exchange, the investor "receives interest on the investment." Interest on bonds is paid at "regular intervals," usually two times a year, which is why bonds "are often referred to as 'fixed income investments,'" said CNBC Select.
Subscribe to The Week
Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

Sign up for The Week's Free Newsletters
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.
To purchase a bond, you "first pay the bond's issuer the face value (or price) of the bond," and from there, the bond's issuer "pays you interest for loaning them money across the life of the bond in return," said NerdWallet. When the bond reaches its maturity date, the principal amount "must be paid back in full or risk default," said Investopedia.
What are the benefits of investing in bonds?
Two of the major benefits of bonds are their relative safety and predictability. "Bond values don't fluctuate as much as stock prices," and bonds also "offer a predictable income stream, paying you a fixed amount of interest twice a year," said The Motley Fool. Credit ratings add another layer of security to bonds, as some types have these ratings "to show investors the likelihood that they'll get repaid on their investments," said CNBC Select.
Bonds are also a good way to diversify your portfolio and provide risk and downturn protection. Because "bonds generally have a low correlation to stocks," their "value is often up when stocks are down and vice versa," said U.S. News & World Report. Plus, "when the economy slows, falling inflation increases the purchasing power of future bond payments."
Do bonds have downsides?
Of course, bonds have drawbacks as well. For one, the return on investment you will get from bonds is "substantially lower than what you'll get with stocks," said The Motley Fool.
A free daily email with the biggest news stories of the day – and the best features from TheWeek.com
While they may have less risk, there is still the possibility of the issuer defaulting and interest rates falling. There is always the "potential for a bond's value to fall in the secondary market due to competition from newer bonds at more attractive rates," said Investopedia, not to mention the chance that "inflation will erode the value of a fixed-price bond issue."
Should you invest in bonds?
The bottom line: "As a general rule of thumb, bonds can be a great addition to your investment portfolio when used strategically alongside stocks and other assets," said NerdWallet. While bonds do still carry some risk, it generally is lower than that of stocks. Plus, "if you're heavily invested in stocks, bonds are a good way to diversify your portfolio and protect yourself from market volatility," said The Motley Fool. Just make sure to consider your broader investment goals and do your due diligence before committing.
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She previously served as a deputy editor and later a managing editor overseeing investing and savings content at LendingTree and as an editor at the financial startup SmartAsset, where she focused on retirement- and financial-adviser-related content. Before that, Becca was a staff writer at The Week, primarily contributing to Speed Reads.
-
Should you add your child to your credit card?
The Explainer You can make them an authorized user on your account in order to help them build credit
-
How will the new Repayment Assistance Plan for student loans work?
the explainer The Repayment Assistance Plan (RAP) will replace existing income-driven repayment plans
-
What taxes do you pay on a home sale?
The Explainer Some people — though not many — will need to pay capital gains taxes upon selling their home
-
What is an upside-down car loan and how do you get out of it?
the explainer This happens when the outstanding balance on a car loan exceeds the vehicle's worth
-
Is grad school worth it?
the explainer Determine whether the potential for better employment and higher earnings outweighs the upfront cost of school
-
4 ways to cover unexpected home repairs
The Explainer Home is where the heart is — but it might cost you
-
How does a 401(k) hardship withdrawal work and is it smart to take one?
the explainer More Americans than ever are resorting to this option in a pinch
-
How can you borrow less for grad school?
the explainer Borrowers will soon face stricter limits on federal student loans. But there are other ways help cover the cost of grad school.