In bonds, safety and fair returns

If you bought bonds or bond mutual funds last year or early this year, you're probably glad you did.

Bonds continue to offer yields - and returns - well ahead of the US stock market. According to information firm Morningstar Inc., the main bond-fund categories are outperforming all forms of stock funds, money-market funds, and certificates of deposit. Corporate-bond funds are up almost 9 percent this year. Government bond funds are up about the same. Municipal-bond funds are up about 7 percent.

Equities have not fared as well, with all major stock indexes languishing in negative territory for the year.

Granted, stocks and stock mutual funds have shown signs of improvement in recent weeks. Still, there is no assurance that stocks are out of the doldrums - the result of a shrinking economy and the uncertainty in the wake of the Sept. 11 attacks.

The big question is whether fixed-income products will continue to lead the investment field. The consensus among investment professionals: yes.

Bonds "should do well in the period ahead," says Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter published in Ardsley, N.Y. "People in bond funds are in pretty good shape."

Mr. Jacobs expects bond returns to continue to be good, but not quite as striking as in past months. He sees no reason to shift one's overall asset allocation of bonds and stocks at this time.

Scott Berry, who tracks fixed-income products for Morningstar, agrees that bonds will likely not produce as much bang for the buck in the months ahead. "Investors should go into bonds with realistic expectations that the strong performance seen in the last 18 to 24 months will probably not continue," he says.

Falling interest rates "have spurred the solid performance of bonds," Mr. Berry says. But now, with rates at unusually low levels, the US economy may be showing some signs of renewal and ultimately boost the attractiveness of stocks over time, he says.

Where should an average investor go, in terms of the bond market?

Berry, for his part, prefers bond mutual funds over holding individual bonds, given the expertise of fund managers and the diversity inherent in mutual funds. Also, with a bond mutual fund, you can keep your money invested indefinitely, whereas if you own individual bonds, you must reinvest your assets when the bond matures.

High-yield (junk) bond funds seem attractive, some experts say, given solid yields now offered by some hard-pressed companies eager to raise cash. Yet, given their volatility, these funds are far riskier than corporate, municipal, and Treasury bonds, Berry says.

Most small investors, Berry says, should look for intermediate-term bond funds with durations of 5 to 10 years. For investors eager to beat the negligible returns on their money market funds (now around 3 percent), look for short-term bond funds, he says.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK