Investing in your retirement
When you buy a bond, you essentially become
a lender, since a bond is really nothing more
than an IOU that's been issued by a government
In general, bonds are considered
safer investments than stocks. But that's
not always true. Bonds are rated, and the
lower the rating, the better interest they
pay and the riskier they are. Firms such as
Standard & Poor's and Moody's are among agencies
that determine if bonds are "junk" status,
meaning they carry high risk, or "investment
grade," meaning they carry little to moderate
Uncle Sam guarantees U.S. government
bonds, so they're the safest around. They
mature -- or come due -- in various time periods.
Treasury bills generally mature in three months,
while Treasury notes typically mature within
a year. Treasury bonds usually mature in five
to 30 years. Historically, long-term government
bonds have returned an average of 5.4 percent
annually, according to Ibbotson Associates.
Local and state governments
also issue bonds. Not all are guaranteed,
but they're considered relatively safe investments,
depending on a government's creditworthiness.
Municipal bonds have a distinct advantage:
Income is generally exempt from federal taxes
and sometimes from state taxes, too.
Think of these as baskets that may contain
bonds, stocks and cash equivalents. With thousands
to choose from, mutual funds come in a variety
of styles. They may hold a single type of
asset, such as only domestic large-cap stocks,
or a blend of investments, such as a mix of
stocks and bonds in a balanced fund.
Mutual funds also come in a
variety of styles. Some are riskier than others.
Index funds are geared to mimic certain indices
(such as the Standard & Poor's 500) and they
tend to be more tax-efficient and less costly
than, say, managed funds, which may also have
sales charges and other expenses.
Mutual funds enable investors
to buy a multitude of assets relatively cheaply.
Instead of spending $1,000 for shares of a
single company, you could spend the same amount
on a fund that holds the same company plus
many others. It's a cheap way to diversify
your assets and hedge against risk.
Mutual fund companies generally
are run by managers who pay close attention
to how assets are performing. If you don't
have the time or expertise to monitor various
investments, then putting money into a mutual
fund can be a safer, more practical way to