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No Respect!

Investing in bonds

This story appears in the March 2000 issue of Business Start-Ups magazine.

The Rodney Dangerfield of the investment landscape, bonds are usually characterized as boring investments for those without the cojones to step into stocks. But the name of the game is diversification, and with most of your cash stuffed into the stock market, it's easy to forget that even the most sophisticated stock jocks need to give bonds some respect . . . and a place in their portfolio. Sure, you'll swing for the fences with stocks, but you'll sleep better at night getting into bonds.

Simply put, a bond is a loan. When you buy a bond, you are lending someone, usually the U.S. government or a large company, your money. In exchange, you are entitled to receive regular interest payments. While bonds generally don't return as many dividends as stocks, they don't entail the same level of risk. If a company goes bankrupt, bondholders get paid first, even before stockholders. So although it's possible to lose money investing in bonds, they're generally considered less risky than stocks, especially when you buy them through mutual funds. Bonds are excellent for older investors who need an income for retirement. But if you're dreaming of a life of partying off your bond investments, put down that pipe! Unless you have Milken-esque millions at work, there's no way you could live off the interest income a bond generates, which generally averages between 4 and 9 percent.

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