A Primer on Buying Bonds

How do you actually buy bonds, and what do you look for? We walk you through that process here.

How To Find Bonds and Choose The Right One

There's no public marketplace for buying bonds like there is for buying stocks. But that doesn't mean it's harder to add bonds to your portfolio. In fact, there's one place you can reliably buy bonds directly from the organization that issues them: the U.S. government.

You can buy anything from TIPS to T-Bills by simply opening an account on the government's TreasuryDirect website.

If government bonds aren't doing it for you, you'll need to find a broker. As is often the case, adding a player to your equation means one more person to get paid. The markup you pay will vary, so it may take some research to be sure you get a fair deal.

Whether you're in the market for corporate bonds or municipal bonds (aka "munis"), a broker should be able to meet your needs.

Overwhelmed by the Choices of Bonds?

Maybe you'd like more variety in your life than the Fed's offerings, but you aren't interested in weeding through individual bonds on your own. If that's not for you, look at bond funds, which buy up lots of bonds and offer you a slice of the action.

In addition to saving you time and energy, bond funds offer a couple other useful advantages. For example, you can use them to add a wider variety of bonds to your portfolio, or to target specific types of bonds with similar features, such as lower risk of loan defaults, longer payback periods or higher interest payments. That's a quick way to add what the pros call diversification to your bond holdings—spreading out your risk and smoothing out any unexpected bumps in the road.

Picking Better Bonds

It's worth doing some legwork to make sure the organization issuing your bond won't leave you holding the bag. Credit ratings from Standard & Poor's and Moody's can help you figure out whether you're looking at a pretty safe bet or a bigger risk.

The chart below puts bonds on a safest-to-riskiest continuum. Federal and municipal bonds are generally safest, as are bonds from large blue-chip companies. Riskier bonds, from less-secure companies or unstable foreign governments, have to pay more interest to entice investors. Just beware of anything rated lower than BBB. That's the dividing line between more stable, investment-grade bonds and non­investment grade ones, often known as junk bonds.
 

Whatever you pick, keep in mind the role you want bonds to play in your portfolio. If, like most investors, you use stocks and other riskier securities to help increase your long-term outlook, it might be best to go with more stable bonds to help balance out short-term losses. That's the essence of asset allocation, and a proven strategy for growth over the long haul.