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Back to the Basics with Bonds... Page 2
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TLast are the municipal bonds. State and local governments to raise money for operations
issue municipal bonds. The beauty of the municipal bond is that it is a friend of the high
tax bracket investor. Income is free from taxation and provides a tax shelter for
individuals with tax brackets generally over 28 percent.
It is usually wise to purchase bonds through mutual fund families offering many types of
bond investments rather than trying to sort out and diversify a portfolio of bonds
yourself. Most of the major mutual fund families have bond funds with maturities from
short to long, risk levels from ultra-safe to risky and fairly low minimum investments. In
establishing your bond portfolio, you might want to take a "laddered" approach.
Invest in short term, intermediate, and long term bond funds. The shorter the term of the
bonds in the fund, the lower the risk. In an uncertain interest rate environment, many
investors "park" cash in short-term bond funds. You can also look into mutual
fund families and find investment grade bond funds; municipal bond funds and junk (often
called high-yield) bond funds and spread your portfolio out between them to provide
maximum diversification. Also, consider convertible bonds -- the topic of a previous
column.
One nice thing about using mutual fund families to purchase bonds is that you can make the
purchase directly. You don't have to go through a broker -- either online or traditional.
You can lower your transactions costs by simply ordering the prospectus from a variety of
fund families and making your investment directly. You can even set up automatic
investment plans if you want to invest a little in your bond portfolio each month.
Consider adding bonds to your portfolio. They will provide you with a fixed income stream
in the event of a market downturn. If you're a young investor, stick with corporate bonds,
convertible bonds and, perhaps, a junk bond fund. If you're a bit older, then get a little
more conservative and look for investment grade corporate bonds, municipal bonds, and
convertible bonds. As you near retirement, consider Treasury bonds as a virtually
risk-free part of your portfolio.
Bonds have been out of fashion for some time due to their low yield as compared to the
stock market. When the NASDAQ corrected in the spring of 2000, investors turned to bond
funds to hedge against risk. Don't put yourself in that position. Prepare for the future
by making bonds a valuable addition to your portfolio now.
One codicil. If you have faith in our Social Security system, you can look upon your
social security contributions as a proxy bond portfolio. An article in a recent issue of
Parade magazine discusses this option. When you get your next Social Security benefits
statement, divide your estimated Social Security benefit by the rate of return on a
10-year Treasury bill, currently about 6 percent. You will then find out that you hold
some equivalent of a bond portfolio. This twist on bonds may lead you to hold more of your
401K or pension plan in common stock and lower your actual bond investment. Remember,
however, that it's better to be safe than sorry!
Copyright © 2000 Rosemary Carlson.
Rosemary Carlson is a freelance columnist and
feature writer in personal finance, investments and the financial markets. She has been a
Professor of Finance at Morehead State University for 18 years and worked extensively in
the online learning area in finance. Visit Dr. Carlson's homepage at http://www.carlsonwriterprofessor.com or
email her at rcarlson@mis.net. |
