Jill Schlesinger Explains Bonds, Compounding, and Target Date Funds

Understanding Bonds

• 🤝 When you buy a bond, you are essentially making a loan to an entity, such as the US government, a state, a city, or a company.
• ⏳ This loan is for a predetermined period (the term) with a fixed rate of interest, and the borrowing entity is responsible for interest payments and repaying the principal at the end of the term.
• 📈 The risk of not getting paid back directly influences the interest rate demanded by bond buyers; higher risk means higher interest.
• ⚠️ Bond prices can fluctuate during their term, especially if market interest rates rise above the bond's fixed rate, necessitating a price reduction to attract buyers.

The Power of Compounding

• 💰 Compounding is the process where your initial investment earns interest, and then that interest also starts earning interest.
• 📈 For example, $100 at 5% annual interest grows to $105 after one year, and then to $110.25 after two years, as interest is earned on both the principal and the accumulated interest.
• ⏳ Time is a crucial factor in compounding; starting to save early allows your money to grow significantly over longer periods.

Target Date Funds Explained

• 🎯 Target date funds are designed to allocate retirement money across stocks, bonds, and cash based on your intended retirement date.
• ⚠️ These funds do not eliminate risk or prevent losses when markets decline, but they simplify the investment process, especially for beginners.
• 🔍 It's important to review the expenses of target date funds, as they can sometimes be higher than those of index funds offered within the same retirement plans.