| Stock investing and bond investing have much in | | | | smaller-company stocks and take more risk |
| common. If you want quality you pay for it. If | | | | hoping to make money from a significant rise in |
| you take more risk you can make more money. | | | | stock price. |
| You can invest in the individual securities or in | | | | Stock investing and bond investing both involve a |
| funds: stock funds and bond funds. | | | | tradeoff of quality and stability vs. more risk and |
| Let's look at bond investing basics first. High | | | | higher profit potential. That said, there is at least |
| quality bonds and high quality bond funds have | | | | one other major similarity. Higher inflation and |
| less credit risk. This is comforting because you | | | | higher interest rates (the dynamic duel) work |
| are lending money to make money when | | | | against both of them. We haven't seen interest |
| investing in bonds. Your goal is to earn higher | | | | rates and/or inflation on the rise in years. That's |
| interest with relative price stability. High quality | | | | why most people buy the line that if you own |
| bonds and bond funds pay less interest than | | | | both securities... stocks and bonds... losses in one |
| lower rated securities, all else being equal. | | | | will be offset by gains in the other. |
| In other words, in bond investing you pay for high | | | | Bonds and bond funds lose value when interest |
| quality. In simplest terms, you take more risk and | | | | rates and inflation increase. Period. Stocks and |
| earn more interest if you accept lower quality. | | | | stock funds got crushed in 1973-1974 and again in |
| The other basic way to earn more interest is to | | | | the early 1980's when the dynamic duel headed |
| invest in long-term bonds and bond funds vs. | | | | north together. Corporate profits fell and the |
| short-term securities. Even with tax-free municipal | | | | stock market followed suit. |
| bonds quality and time to maturity will determine | | | | I cringe when I hear self-proclaimed experts say |
| risk and rate of interest. | | | | that it's easy to make money investing. That was |
| Traditional blue chip stocks and stock funds that | | | | the case from 1982 through the year 1999. It has |
| invest in them are of the highest quality and have | | | | not been the case since, and interest rates and |
| excellent track records for paying dividends. Once | | | | inflation have been tame and cooperative. To |
| again, under normal circumstances you pay for | | | | make money investing over the next few years |
| this high quality and lower risk. To increase your | | | | you will need a sound investment strategy. |
| profit potential you can forego a steady | | | | And you will need to keep an eye on both |
| dependable dividend and go with growth stocks. | | | | interest rates and inflation - the dynamic dual and |
| Or, you can go with less established or | | | | possibly your worst investment partner. |