Where to Get Good Paper

Where to Get Good Paper

Brokers, funds, and Uncle Sam all offer an on-ramp to investing

Once you’ve selected from the variety of available bonds – government bonds, U.S. Savings bonds, Treasury bills, Treasury notes, municipal bonds, and corporate bonds – how do you go about buying them? Depending on the type, you have a few choices.

Municipals and corporate bonds are bought through brokers. You can buy Treasuries through a bank, a broker, a mutual fund, or through a government program called Treadury Direct.

The advantage of buying through the government is that there is no commission. For more information, wirte Department of the Treasury, Bureau of the Public Debt, Washington, D.C. 20239.

You also can open an account and learn about scheduled bond auctions. Two- and three-year bonds are available for a minimum $5,000 investment. Five0an 10-year notes require a minimum $10,000 investment.

For greater diversification, you can turn to bond funds (see table, below). They are convenient – you can invest in small amounts and a professional manager runs the show. A drawback: Bond fund constantly trade bonds and don’t hold them to maturity, so you lose the guarantee that you’ll get a bond’s face value at a certain date.

When investing in bond funds, also be sure to scrutinize fees and other expenses. After all, the return on bond funds is so low, why dish out 4 percent or 5 percent? To find the true return, find out the yield and subtract the fund’s annual expense ratio.

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Choosing a Bond Strategy

The determining factor is when you expect to cash in

Time frame: Less than 1 year. Type of bond: Any. You may want to consider a money market fund for stability of principal.

Time frame: 1 -2 years. Type of bond: Short-term bond. If interest rates are stable or fall, you could get higher than money market fund yields as well as potential capital appreciation. If interest rates rise, this fund could still be a good choice. Unless rates rise substantially, the income you get may make up some of the fosses to principal and may still put you ahead of where you’d be in a money market fund.

Time frame: 2 – 4 years. Type of bond: Federal or state tax-free bond, mortgage bond, government bond, investment grade bond. If you are counting on the fund to supply you a stream of income, keep in mind that higher yields can compensate for some of the drop in the value of your account. If you invested to diversify a stock portfolio, keep in mind that the long-term price volatility of bonds is typically lower than that of stocks.

Time frame: More than 4 years. Type of bond: Aggressive bond. Although interest rates can affect these funds, they tend to benefit a healthy economy. Over the long term, income provides the bulk of total return in bond funds. If you are comfortable with the quality risk, aggressive funds provide the highest income.