Chapter 9

Securing Investment Income and Principal with Bonds


Making sense of the various types of bonds

Using bonds in a portfolio

Choosing the best bonds for your situation

When you invest, it’s fun and rewarding to see your investments grow over the years. Riskier investments like stocks and real estate can produce generous long-term returns, well in excess of the rate of inflation. But lending investments like bonds make sense for a portion of your money if

  • You expect to sell some of those investments within five years. Stocks and other growth-oriented investments can fluctuate too much in value to ensure your getting your principal back within five years.
  • Investment volatility makes you nervous, or you just want to cushion some of the volatility of your other, riskier investments. High-quality and shorter-term bonds tend to provide investors a smoother ride.
  • You need more current income from your investments. Bonds tend to produce more income in the short term. That said, you need to be aware that dividend-paying stocks may offer more income over the long term, as their dividends tend to increase over time.
  • You don’t need to make your money grow after inflation and taxes. Perhaps you’re one of those rare folks who has managed to amass a nice-size nest egg at a relatively young age, and you’re less concerned with growing that money.

Mind you, all these conditions need not apply for you to put some of your money into bonds. Also, this list isn’t meant to ...

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