Don't Forget the Bonds!

An intelligently assembled portfolio of bonds is an important ingredient in a balanced investment strategy.

Whether you're looking to invest for gain or save for the long-term, there's a right way to use boring old bonds to balance out your more volatile investments like stocks.

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Some simple guidelines:

The traditional rule of thumb for many people is to invest 30% of your portfolio in bonds or bond funds, 60% in stocks and 10% in cash.

Tweak those figures to meet your investing goals and match your financial status. A young investor will be interested primarily in growth (more stocks) while someone nearing retirement will tend to want a safe, reliable source of income (more bonds).

Many and marvelous are the varieties of bonds, but the three basic groups are Treasury, municipal and corporate bonds. Municipal bonds come with exemptions on federal, state and local income tax, and Treasury bonds come with state tax exemptions, that make them attractive to high-bracket investors. They are also relatively safe.

Bonds are rated according to the likelihood that the company or government agency will be able to pay back the loan it has taken out with you. Stick with bonds rated "investment grade," BBB (or Baa) and higher. Everything below that is "junk" and denotes higher risks. Moody's and Standard & Poor's are considered the most reliable rating agencies. You can view ratings at for free, but the number of bond issues out there can make it confusing. Ask your broker for a bond's rating before you buy.

Consider mutual funds that invest in bonds if you decide to go the corporate route. Unless you think you can research a company's future ability to pay off its debts, it's best to leave it to a professional as long as you know what grades and types of bonds the fund will buy.

"Ladder" your bond portfolio by buying bonds with different maturities so that you'll have both income and a ready source of capital if interest rates move up unexpectedly. Invest more in short-term bonds when interest rates are rising and more in longer-term securities when you're convinced rates have topped out so you can lock in a high yield.