The Risks and Rewards of Being a Bond Girl

In James Bond movies the so-called "Bond Girls" were the epitome of excitement, danger and intrigue. In the financial world, bonds are generally sought by those looking for the exact opposite. So let's take a look at whether or not you should become a bond girl; what role should bonds play in your portfolio?

What Are Bonds Anyway?

Most people have an intuitive idea about what stocks are, but bonds may be a bit more of a mystery. Stated simply, a bond is an agreement: you, the buyer, agree to loan your money to another party for a stated period of time at a given interest rate.

So who's the loan recipient? The seller of the bond is usually a government or a large corporation -- they need money for a project and are willing to pay to use yours. For example, a city might want to build a toll road. You would purchase a bond from them, effectively loaning them your money to build it. They then pay you interest for the duration of the bond and pay back your initial investment at the end of the set timeline.

Why Bonds?

So why put bonds in your portfolio? The primary reason has to do with risk. In general, the more risky an asset is, the more its expected reward. If you think about this as a spectrum, at one end you'll have cash and savings accounts, which hardly ever lose their initial investment. Stocks, on the other hand, can be risky investments, so they represent the other extreme. Bonds offer a middle ground where your expected return is better than a CD, but your risk is slightly higher -- the borrower could go into bankruptcy and default on the bond.

We'll expand on this primer on bonds later. As always, a diversified portfolio including stocks, bonds, and less risky investments is usually going to work for most of us; hopefully this will give you a better idea of how much of a bond girl you want to be.

This post is part of the Carnival of Wealth. Be sure to go check out all their great posts.