The Evergreen Letter: Training on How to Invest in Bonds

Let's say you buy a 5-year bond from a company for $1000. It earns a yield of 5%, which means that the company will pay you 5% interest on that $1000 for five years. At the end of the five years, you get your $1000 back.

You are similar to a banker making a loan. You loan money, you get paid interest, and ultimately you get back the money you loaned. There are differences, of course, but the similarities give you a good idea of why you want to own bonds. They owe you; you are in a position of power. It is the opposite of a credit card.

A $1000 bond that pays 5% interest will earn $50 in a year. After five years, it will have paid you $250, meaning your $1000 will have become $1250.

That's how bonds work. They are issued by companies and by governments. They are issued all over the world, and in practically every currency. You can easily obtain access to markets where they are sold.

A bond portfolio can earn more or less than 5%. At the low end, on January 21, 2010, a 5-year US Treasury Bond would pay you 2.65%. That is considered a risk-free investment. In the middle, investment grade corporate bonds would pay you 6.32%. At the high end, risky ventures in emerging economies would pay 9.25%.

The Evergreen Letter shows you how to create a bond ladder full of the set of bonds that best meet your objectives. We think it is entirely possible to meet or even beat the long-term returns of the S&P 500 with a well-managed international bond portfolio. We'll show you how to try do it. We can't guarantee results, of course, but we can give you tactical coaching and training.

We can also give you a goal to reach or beat: out perform the S&P 500's 20-year returns.

The blue line below shows what would have happened if you had invested $100,000 in the S&P 500 twenty years ago, and just left it there. By 2010, it would be worth $338,854, more than three and a third times as much.

The red line shows a bond portfolio. Same thing: you started with $100,000 twenty years ago. Only here you are paid 6.292%. By 2010, you would have $348,994 - almost three and a half times as much, and $10,140 more than the stock portfolio.

More importantly, your life would have looked like the red line. Stable. Predictable. Arcing upward.

Where did the 6.292% interest rate come from? Well, if you run a calculation on the blue stock market line and ask, "what would this line look like if it was smooth?", you get what is called the Compound Annual Growth Rate. For the S&P 500, that's 6.292% per year.

Here's what it looks like if you invested your $100,000 ten years ago. The red line shows the bond portfolio earning the same rate, the S&P 500 20-year CAGR of 6.292%. The blue line is the S&P 500, which lost nearly 13% over the last decade, leaving you with only $87,142. The bond portfolio, however, just about doubled in value, with an ending value of $198,394.

You should learn how to do this for yourself, and you should teach your kids how to do it from when they are little.

The Evergreen Letter includes a library that will teach you the fundamentals about bond investing. If you like to read, we have documents for you. If you like to watch, we have videos for you -- the information is the same.

And every two weeks, we publish an update. It contains strategies for every part of a bond ladder, including recommendations for starting positions.

The price of a bond ranges from $900 to $1100. It makes perfect sense to get your investing life going with a single bond or a few bonds. Then set yourself a goal to buy another one. Then another one. And so on. This way, you build a foundation to stand on.

Follow the Evergreen Letter, and you will gain power over money in your life.

You can take income from the bond portfolio and invest it elsewhere or spend it.

The blue area shows $100,000 invested in a bond portfolio earning 6.292% for ten years. You take half of the interest you earn and put it into the orange account. After ten years, you have $132,151 in the bond portfolio and $36,309 in the orange account.

Remember, if you had put that $100,000 in the stock market ten years ago, you would have $87,142 now, a loss of 12.86%.

Here's something else you should know: Owning a mutual fund of bonds is not the same as owning a bond portfolio.

When you own a bond portfolio full of actual bonds, each of those bonds has a maturity date. On the maturity date, you get your $1000 back. That's crucial. Your principal comes back to you. You are the bank; all of the money you lend out comes back to you.

Mutual funds trade like stocks, and there is never a maturity date when you get your principal back. If you had invested $10,000 in the American Funds Bond Fund of America ten years ago and had left it there, it would now be worth $86,257, for a loss of 13.74%. During the worst of the crisis, you would have seen your "bond" portfolio drop more than 27%.

If you had invested in actual bonds your investment would have continued to behave normally. Even if you had bonds from General Motors, which went bankrupt, you would still have gotten all of your interest payments and you would have gotten your principal back.

You have enough risk in other parts of your life. You have a job you might lose, or a business that might run out of cashflow. You have kids and parents who need you to take care of them. That's where the risk is in your life.

Your life is your whole portfolio. If there's risk in other parts of your life, then your investments should involve as little risk as possible. A bond portfolio may be the perfect solution for you.

You can learn to do this for yourself. You don't need a Financial Advisor. All you need is an account at Charles Schawb, Fidelity, E-Trade or any similar firm that also provides access to bond markets.

And to get you started, and to coach you through the process, you need The Evergreen Letter.