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The Rodney Dangerfield of the investment landscape, bonds areusually characterized as boring investments for those without thecojones to step into stocks. But the name of the game isdiversification, and with most of your cash stuffed into the stockmarket, it's easy to forget that even the most sophisticatedstock jocks need to give bonds somerespect . . . and a place in their portfolio.Sure, you'll swing for the fences with stocks, but you'llsleep better at night getting into bonds.
Simply put, a bond is a loan. When you buy a bond, you arelending someone, usually the U.S. government or a large company,your money. In exchange, you are entitled to receive regularinterest payments. While bonds generally don't return as manydividends as stocks, they don't entail the same level of risk.If a company goes bankrupt, bondholders get paid first, even beforestockholders. So although it's possible to lose money investingin bonds, they're generally considered less risky than stocks,especially when you buy them through mutual funds. Bonds areexcellent for older investors who need an income for retirement.But if you're dreaming of a life of partying off your bondinvestments, put down that pipe! Unless you have Milken-esquemillions at work, there's no way you could live off theinterest income a bond generates, which generally averages between4 and 9 percent.
Compare that return with recent tech stock gains, and bondsmight seem boring . . . but when the stockmarket sags, savvy investors appreciate the steady income bondsprovide. By putting even a small portion of your investments--say,25 percent--in bonds, you're diversifying your portfolio andhelping smooth out overall returns. For example, according toIbbotson Associates of Chicago, a traditional stock portfolio wouldhave returned 7.6 percent per year during the market doldrums of1973 to 1983. During the same period, a diversified portfolio--onewith a portion of its assets in bonds--topped the charts with a10.59 percent annualized return.
Bond mutual funds come in all shapes and sizes, from super-safeU.S. Government bonds (called Treasuries) to risky corporate issuescalled "junk bonds." As with most investments, the higherthe expected return, the higher the risk of losing principal. Bondsdon't live forever, but expire, or come due, on the maturitydate--the date when the entire value of the bond is repaid. Ageneral rule is that the longer the maturity of the bond, the morevolatile the price. If you're looking for a safe haven, stickwith short-term bonds.
Since bonds are less liquid than stocks, most investors shouldgo for bond mutual funds. Because returns on bonds are usually lessthan those on stocks, you should pay no more than a 1 percentmanagement fee for bond funds. All this is listed in a fund'sprospectus, or can be gleaned from Morningstar's Web site athttp://www.morningstar.com
Jonathan Hoenig is a radio personality, market commentatorand principal at Capitalistpig Asset Management in Chicago. DonaldMonroe, an account executive at Capitalistpig, contributed to thiscolumn.
Stock It To Ya
In today's point-and-click investment paradigm, it'sreassuring to know you can still visit your precious holdings inperson. Nothing is more Capitalist Kerouac than going on the roadto see where stocks "live." Here's a quick guide:
- The New York Stock Exchange: The biggest and still thebest. You can watch 800 million shares trade hands while gawking atbeautiful TV anchor Maria Bartiromo, but you'll need to line upwell before its 9:30 a.m. opening due to limited tickets. (11 WallStreet, New York City, http://www.nyse.com)
- The Chicago Board of Trade: Although its massive tradingfloor could house a jumbo jet, one can assume the 5,000 traders,clerks and staff are even more deafening. Watch everything trade"open outcry" from 7:20 a.m. daily. (141 West Jackson,Chicago, http://www.cbot.com)
- Minneapolis Grain Exchange: Under hand-painted frescoes,you can still see a scrappy band of local traders swap contractshere. This historic landmark has guided tours Tuesdays, Wednesdaysand Thursdays. Call ahead to reserve space: (612) 321-7101.(130 Grain Exchange Building, 400 S. Fourth St., Minneapolis,http://www.mgex.com)
- Kansas City Board of Trade: The exchange's (cough,cough) bread and butter is its futures trading in wheat. You canvisit the familiar grain, which has traded here for some 120 years,from 8 a.m. daily. (4800 Main St., #303, Kansas City, Missouri,http://www.kcbt.com)
Among the floors you won't be crashing: the tech-ladenNasdaq. Why? There is none. The media-only "MarketSite,"where CNBC and others hold court, is for the cameras only. Thecomputerized exchange has been floorless since it opened way backin 1971.
