This article was originally published on Kiplinger – https://www.kiplinger.com
Type: U.S. bond
Market value: $54.2 billion
SEC yield: 2.7%*
Another way to diversify is by asset class; that is, going beyond stocks. The most common way of doing that is to invest in bonds – essentially, debt issued by some sort of entity, be it a government or a corporation, that eventually will be repaid and that generates income along the way. These typically have a very low risk of actually losing their principal value, which makes them good for preserving what wealth you do have. In fact, in times of uncertainty, investors might sell some stocks and buy relatively “safer” bonds instead.
However, beginner investors – especially younger ones that have several decades’ worth of investment horizon left – typically don’t need much in the way of bond exposure. Over time, they historically don’t grow nearly as much as stocks. For instance, from 1928 to 2011, U.S. stocks produced a 9.3% annual compound return, while bonds delivered just 5.1%.
Should you want a little exposure to bonds, the iShares Core U.S. Aggregate Bond ETF (AGG, $106.59) is one of the best ETFs to start with. This ETF invests in more than 6,650 bonds of different stripes, including U.S. Treasuries – some of the most highly rated (and thus considered safe) debt on the planet – investment-grade corporate debt and securities that are backed by mortgages.
And at 2.7%, AGG yields a decent amount more than the S&P 500. But while it offers safety and yield, remember that stocks are likely going to outperform it over time.
*SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.