No Respect! Investing in bonds

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.