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Investing in Bonds and Bond Funds for Novices

Summary: Buy I-Bonds up to the $10,000/year purchase limit before looking at other bonds. Aside from municipal bonds, other bonds and bond funds are not good investments without an IRA.

I talked about what bonds are and different types of bonds already, and I recommend reviewing that article first. Here, I will discuss specific bonds and bond funds in more depth. This article assumes that the investment is being done in a regular (taxable) account rather than an IRA.

Just as with stock funds, Vanguard’s bond funds offer a discounted Admiral version of each fund for investing $10,000 or more.

Important Review: Expense Ratios

The expense ratio is the percentage of your investment charged as a fee. Expense ratios rarely change, though Vanguard funds’ expense ratios have decreased slightly. Low expense ratios are the most predictive indicator of future performance, and therefore paramount to long term returns. In bonds, expense ratios are a much larger percentage of return, because bonds grow less than stocks.

Investing in Stocks and Bonds for Beginners

On The Best of Sett

Summary: Most funds require a minimum investment of $3,000. But you can invest in several index funds through Betterment, which doesn't have minimum deposits or hidden fees, and makes investing much simpler by selecting several index funds for you.

We’ve come a long way! As a reminder, here is a cheat sheet to remind you of what you can expect from each investment.

You can feel that money burning a hole in your pocket, and want to start investing right away I can tell. Let's look at some of your options as far as brokerages:

Your employer's 401k: Chances are, the investment options provided by your employer's retirement plan are limited and the fees are high (average .71%/person in 2011). However, you should contribute at least as much as your employer will match- something like a 50% match up to 6% of your paycheck. 50% risk-free return in a tax-deferred account? That's a no-brainer.

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