| Bonds offer a stable-return for long-term | | | | have a higher yield. |
| investors. They are often referred to as | | | | Conversely, if interest rates are falling, a bond |
| "fixed-income" investments because they provide | | | | issued six months ago will be worth more than its |
| a stable rate of return (called yield) for investors. | | | | original purchase price, since current issues offer a |
| Bonds are also the most common hedge against | | | | higher yield. |
| stock volatility, because stock market volatility will | | | | Mutual Funds |
| not affect bond prices. But it is a challenge for | | | | Interest rate risk and credit risk and bond prices |
| individual investors to benefit from bonds. Most | | | | in general are highly specialized areas that most |
| bonds are offered in denominations of $1000 or | | | | individuals don't have the resources or the |
| higher, so an investor will need upwards of | | | | expertise to enter into. Furthermore, the various |
| $50,000 to put together a well-diversified bond | | | | types of bonds issued (asset-backed, convertibles, |
| portfolio. | | | | munis, high-yield) make the bond market appear |
| Enter fixed-income funds. Fixed-income funds | | | | overwhelming. |
| offer small investors a way to invest smaller | | | | Fixed-income funds can offer the stable returns |
| amounts into this essential asset class. | | | | and expertise of experienced bond traders at a |
| Risk | | | | reasonable entry-level. |
| Investing in bonds carries two main risks: Credit | | | | The best funds will allow the management to |
| Risk and Interest Rate Risk. | | | | invest in a widely diversified array of bonds. |
| Credit Risk | | | | Management is best able to assess the market |
| Credit Risk is the risk that the bond's value will | | | | and determine which issues are likely to perform |
| decline because the credit rating of the issuer falls. | | | | best. |
| Many bond investors holding auto manufacturer | | | | Sometimes short-term low-yield Treasury |
| and airline bonds have experienced this in recent | | | | securities will be the best fixed-income |
| years. | | | | investment. At other times, long-term high-grade |
| Government bonds are typically immune to credit | | | | corporate notes will be favorably priced. In the |
| risk, but emerging markets bonds are an | | | | 1980s and 1990s, high-yield junk bonds, issued by |
| exception. In recent years Brazil and Argentina | | | | companies with low credit ratings, performed |
| have defaulted on obligations. Currently, Iraq | | | | best. |
| bonds are at a high risk of default. | | | | For this reason, diversified bond funds work best |
| Interest Rate Risk | | | | for individual investors. Such funds will benefit |
| Bond values fall when interest rates rise. While | | | | from all possible issuers and types. The PIMCO |
| most everybody knows this rule, few understand | | | | Total Return Fund, PIMCO Diversified Income, and |
| how and why it works. | | | | the Dodge and Cox Income Fund are excellent |
| When current yields (interest rates) rise, then | | | | choices with reasonable expense ratios. |
| new bond issues are at a higher yield than old | | | | Municipal bond funds offer a tax-efficient income |
| issues. So, a bond that's six month's old will lose | | | | stream, as the returns from these funds are |
| value if interest rates have risen, since new bonds | | | | deductible from most state and local taxes. |