Chapter One
WHY BONDS?The Bare Essentials
* A balanced portfolio of stocks and bonds can help most investors accomplish long-term investment goals more effectively than a pure equity strategy.
* Bonds provide solutions for two of the three most basic investment requirements: income and capital preservation.
* A bond is a security that pays a specified rate of interest for a limited amount of time and returns principal on a defined date.
Despite the diversity and breadth of today's media, the stock market inevitablydominates business news. You'd think there was nothing else totalk about. To be sure, the bond market occasionally takes center stage-usually when the Federal Reserve is about to make an announcement orwhen inflation concerns suddenly begin to percolate-but for the mostpart that's the exception, not the rule.
Of course, the motivations of news editors are easy to decipher. Muchlike homicide
Chapter One
WHY BONDS?The Bare Essentials
* A balanced portfolio of stocks and bonds can help most investors accomplish long-term investment goals more effectively than a pure equity strategy.
* Bonds provide solutions for two of the three most basic investment requirements: income and capital preservation.
* A bond is a security that pays a specified rate of interest for a limited amount of time and returns principal on a defined date.
Despite the diversity and breadth of today's media, the stock market inevitablydominates business news. You'd think there was nothing else totalk about. To be sure, the bond market occasionally takes center stage-usually when the Federal Reserve is about to make an announcement orwhen inflation concerns suddenly begin to percolate-but for the mostpart that's the exception, not the rule.
Of course, the motivations of news editors are easy to decipher. Muchlike homicides and natural disasters, the stock market simply generatesbetter headlines than the sleepy bond market. I guess it's because all theelements of suspense are there, with quick fortunes made (and lost) moreoften in stocks than in bonds. Frankly, I'd be hard pressed to disagree-stocksare more newsworthy than bonds. So I'm not going to waste yourtime arguing to the contrary. But consider this: after the dramatic stockmarket decline that began in 2000, bonds outperformed equities for threeyears in a row. Now that's newsworthy.
I would also contend that a balanced portfolio of stocks and bonds canhelp most of you accomplish long-term investment goals more effectivelythan a pure equity strategy. This is not an original idea. Withrare exception, stocks and bonds represent the two largest componentsof the three main asset classes recommended by most investment firms(the other would be cash). Consequently, the question is not whetheryou should own stocks or bonds, but how much of your investment portfolioshould be allocated to each asset class.
You see, bonds provide solutions for two of the three most basicinvestment requirements: Income and capital preservation. The otherobjective, growth, is more appropriately achieved through stock investing.That's why stocks and bonds complement each other so well. Together,your bases are covered.
But we're getting a little ahead of ourselves here. Now that you understandsome of the most compelling reasons why bonds are important,let's take a step back and briefly discuss what they are. Ironically, thebest way to do this is to forget about bonds for a moment and insteadthink about what happens when you purchase a home. A loan officerinforms you that the bank would be happy to lend you money as long asyou promise to repay it in 15 or 30 years. Suppose you settle on a 30-yearterm. That's fine, but there's one more important caveat-it'll cost you,say, 6.75 percent annual interest for the privilege. It seems fair, so you signthe loan agreement.
It's the same scenario when you purchase a bond, except you're thebank, so you're making the loan. And as the bank, you expect borrowersto repay loans by a specific date and at an agreed-upon rate of interest.That's how bonds work. In other words, as a bondholder, your purchaseis effectively a loan that will be repaid after a certain length of time and,during the life of the loan, you'll be paid a fixed rate of interest. That'swhy bonds are also known as fixed-income securities.
Continues...
Excerpted from Un Mesaje de Garcia / A Message from Garciaby Charles Patrick Garcia Copyright © 2003 by Charles Patrick Garcia. Excerpted by permission.
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