Filed under: Interviews, Personal finance

With the recent turmoil in markets lately, there’s been lots of talk about bonds. What is an investor to do?

Well, I had a chance to interview Ken Little, whose latest book is The Pocket Idiot’s Guide to Investing in Bonds (Pocket Idiot’s Guides).

How was the experience in writing the book? Surprises?

Ken: This is my 11th book, so I have a pretty strong work ethic about what needs to get done. This is the first book I have done on bonds, so it was a learning experience to go deeper in the subject than my existing knowledge.

The big surprise for me was how few resources are available to individual investors in corporate and municipal bonds. Since you buy U.S. Treasuries directly from the government (or through a bank or broker), it is easy to learn how that system works. However, for corporate and municipal bonds it is much more difficult. The bottom line is individual investors pay a premium in most cases and must be prepared to invest $25,000 and up. When you consider that institutional investors own the vast majority (+90%) of those bonds, it starts to make sense that buying one or two bonds at a trade does not fit the market well.

There’s been lots of volatility lately — in equities and fixed income. What are some smart strategies for individual investors? Opportunities because of the recent volatility?

Ken: The role of bonds in individual portfolios is to provide income and to offset the volatility that is naturally part of the stock market. If you read some of the reports about the recent swings in the Dow, you would think this had never happened before, when in fact it happens all the time. The stock market goes up and it goes down. The smart strategy for most individual investors is to begin an investment plan of dollar cost averaging and stick with it regardless of what the market does. Too many times, we see individuals get excited by a string of Dow record highs and decide that this is the time to start investing only to bail out after we have a bad couple of days in the market, thus executing the perfect buy high and sell low strategy.

For investors who are more experienced, now is a good time to look for values. Has a stock been beaten up just because it was in the wrong neighborhood, but the company still has solid fundamentals and the industry good prospects?

What are some of the mistakes typical individual investors make with bonds?

Ken: The biggest mistake most investors make is not using bonds as part of their portfolio, especially those folks at or in retirement. The stock market is not the place for money you may need in the short-term. Failing to convert a major portion of your equities into bonds (U.S. Treasuries and agencies) and bond funds as you near retirement is asking for a major downturn to wipe out a big chunk of your capital. You need to keep a portion of your assets in stocks to protect against inflation, but for retired people most of your holdings should be in bonds and cash.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

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This entry was posted on Monday, August 13th, 2007 at 10:02 pm and is filed under Stocks Money News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.