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Balancing Your Portfolio With Bonds

The pros and cons of investing in bonds

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This story appears in the November 2000 issue of Entrepreneurs Start-Ups magazine.

When financial advisors recommend maintaining a balanced portfolio, they don't mean investing 50 percent of your funds in a high-tech software firm and the other half in an Internet start-up. While that combination may have provided handsome returns at the end of the last decade, we're back in Kansas now, Toto, and it's time for a reality check.

Balance means diversification-stocks, bonds, cash-as a hedge against volatility. One investment option we've all heard of but know little about is high-yield municipal bonds. Municipal debt typically involves not-for-profit entities issuing debt for public projects or municipalities issuing debt backed by its taxing authority. In essence, they are debt securities that are issued to finance hospitals, utilities, airports and other essential facilities. Subsequently, municipal bonds, by serving a public purpose, have an underlying strength that helps explain why munis have shown a lower default rate over time compared to corporate debt.

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