AFTER THE SORRY performance of the stock market over the last three years, even the most addicted of stock junkies now see the beauty of bonds. After all, the recent bear market hasn't been nearly as ugly for investors who balanced potentially volatile long-term portfolios with a helping of fixed income. Sure, visiting the bond market is a little like a trip to the methadone treatment center — everything seems a little less...vibrant. But that's precisely the point; sometimes you want some plain vanilla stability.
What you need is a manageable framework for building some fixed-income exposure, the kind we talk about in Smoothing Out the Ride — our basic bond strategy. There, we'll show you which types of bonds make the most sense for buy-and-hold investors. And in Laddering Your Bond Portfolio, we will explain the best way to take advantage of different maturities. If buying your own bonds sounds too ambitious, we've also got some recommended bond funds. But we'd encourage you to consider creating your own portfolio. It's cheaper and it's not as hard as it seems.
The first thing to do, though, is to figure out what percentage of your overall portfolio should be devoted to bonds. So before you jump in, make sure you visit the SmartMoney One Asset Allocation system (located in the Taking Action section). It will give you a solid estimate based on your age, financial situation and outlook.
It's true that not all bond investors seek income and security. Some people buy bonds for the potential trading profits. If you're more interested in the speculative nature of bonds, check out So You Wanna Be a Bond Trader? at the end of this section. We've got a worksheet to help you figure out how much risk to take and advice on what sorts of bonds might be the most profitable.
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