Bond Investment 2005

An improving economy brings with it higher risks of inflation and greater
demand for loans. These typically lead to bad news for Bonds - in the
form of higher short and long term interest rates, since bond prices move
in the opposite direction of rates.

Over the next year or so, it may be difficult to receive much of a boost in
your portfolio from the Bond part of it. But that does not mean that you
should stop regular investment of part of your savings in Bonds. We
must remind you that Bonds typically have far less risk of losing money
than stocks, especially individual ones, have. The year 1994 was the worst
year in the past decade for bonds. Even then the average bond fund fell
only 3.5% in that year. In comparison let us look at the post-internet
-bubble year of 2002. The S&P 500 index fell by whopping 22% in that
year alone. In any state of the economy, investment in Bonds are
important for keeping your portfolio diversified and less vulnerable.

Also, remember that in recent years Bonds have returned more than
stocks have. But just like we advise to avoid putting money in individual
stocks, we also advise you to stay away from worries associated with
investing in individual Bonds (like the global economy trends, impact
of rate increases, maturity considerations etc) and put your hard-earned
money in Bond funds, like Vanguard Short-term Corporate Bonds (low
0.23% expense ratio; 20 year record of superior returns), Evergreen High
Income Municipal Bonds (high yield focus; less vulnerability to rising rates
and inflation), FPA New Income Fund (great track record for investing in
right bonds at right time).