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One of the more popular investment vehicles these days is the bond. Bonds are becoming popular because they are seen as “safe” investments. And at a time when people are concerned about preserving their capital, bonds can seem like a good idea. I agree that bonds can be a useful part of your investment portfolio, but I also think that panicking and avoiding stocks and other investments altogether is a bad idea. Try to approach asset allocation with long-term goals in mind, and use bonds as part of an overall investing strategy.

The basics of bonds: Treasury, Corporate and Municipal

When investing in bonds, it is a good idea to understand how they work. First of all, bonds represent debt. You are essentially making a loan to an entity. You will be paid a certain rate of interest for the loan, which you can collect regularly. When the term of the loan is up, you are repaid the full face value of the bond. There are three main types of bonds, and TheSUBWAY explains what they are:

Treasury bonds, also known as “T-bonds” for short, are issued by the United States government and are considered to be the safest of the three bonds.  The only risk is if they are sold prior to maturity (but this holds true for all bonds). Super-safety comes at a cost, though, and in the case of treasury bonds that means lower returns than other bonds. …

Corporate bonds are issued by companies in order to raise capital.  While they can be very safe investments when issued by strong, established companies, the reverse is true for companies that are not rock solid. Unlike treasury bonds, corporate bonds have what is known as a “call provision”, which allows the bond holder to get their principle investment back before maturity.

Most corporate bonds have fixed interest rates, and some, called “zero coupons” are sold at a significant discount in exchange for the bondholder agreeing to wait until maturity to receive interest payments. …

Municipal bonds are issued by state, county, or city governments for the purpose of financing government sponsored functions (I.E., building a highway or a school), or for other “non governmental” purposes, such as raising money for low income housing or student loans.

Municipal bonds, like T-bonds, pay interest twice a year.  These investments can be very safe, but do carry risks as well. Moody’s and Standard & Poor rate municipal bonds based on their credit quality, so when investing in them, it’s a very good idea to use these ratings as a guideline.

Depending on whether you sell in the secondary market, or whether there is a chance of default, different bonds have different risks. Carefully evaluate your situation and goals to figure out which bonds are best for your investment portfolio.

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I saw this great image of an asset allocation pyramid over at Oblivious Investor (he gave everyone carte blanche to use it), and I thought I’d share it, with my thoughts:

This represents what might be called a “healthy” asset allocation in most cases. Now, of course, everyone is different, and your individual situation may call for a different asset allocation. But, for the most part, you are likely to do fairly well if you pay attention to this investment guide.

Bottom of the pyramid: Stock funds. As you can see diversified stock funds are the base of a health investing portfolio. This is because, over time, the stock market offers the highest, most solid returns for the money. Any long term investing plan should include stocks in the form of funds.

Level two, pyramid: Bond funds and real estate. As one might expect, more people are focusing on the bond funds right now, since they are safer. Indeed, these “safe” investments should be one of the ways that you are able to get some small returns (even though they don’t quite beat inflation right now) — the main idea, though, is to protect principal. Real estate is on this level as well, since it can be a good investment if you hold on to it for the long term.

Level three, pyramid: I like that the emergency fund is included in this level. I would go so far as to add a CD ladder in this area as well. An emergency fund in an interest bearing account is, in fact, an investment — after all, it does yield returns. And this level also includes individual stock picks. Be careful of these, since they mean that there is less diversity, and less room to pick wrong than in stock funds.

Top of the pyramid: Finally, the top of the asset allocation pyramid consists of the speculative and volatile investments like commodities and collectibles. I put futures and currencies in this category as well, since they can be equally risky. You should devote only a small portion of your investment portfolio to these volatile investments.

Following the asset allocation pyramid probably won’t make you wildly wealthy in a short amount of time, but it increases your chances of a comfortable future.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.

One of the cardinal “rules” of investing — and becoming a better investor — is to keep investing. No matter what you are investing in,  you should invest in something. Even if your main goal is merely to beat inflation. There are a couple of things you can invest in, other than stocks, that can offer you returns if you are concerned about stocks. (I, however, maintain that now is a great time to look for bargain stocks that are fundamentally strong. Other investments can add diversity, though.) One is relatively safe and the other is quite risky: bonds and currencies.

Investing in bonds

Bonds represent debt. This can be government debt or corporate debt. Right now, many people are skittish about corporate debt — and for good reason. If you get into corporate bonds, many people cynically observe that you should buy bonds from companies that are likely to get bailouts.

Government debt, though, is considered “safer” (although all investment carries risk). This is why Treasuries are so popular right now. But you should be aware that U.S. federal bonds may not offer the best return. Municipal bonds are starting to get another look as well. These are local government bonds that — while not considered as “safe” as federal debt — are thought of as reasonably sound.

Investing in currencies

Currency trading is another form of investment. Well, actually it’s speculation. The terminology is couched in trading terms, but really you are speculating as to which currencies will rise against others. One of the benefits currency trading has (and why it’s becoming so popular) is due to the fact that someone always makes money.  If you think that the current debasement of the dollar means good news for the euro, you can favor the euro and short the dollar. You can also favor the dollar against the sterling at the same time if you feel that the British economy is so far in the tank that the pound will have a hard time recovering.

Be warned, though: Currency trading is extremely risky. You can get higher returns, but the risks mean that you can sustain heavier losses.

The important thing, though, is to broaden your investing horizons. So many people think only of stocks when they think of investing. There’s a whole wide world of investing opportunity out there.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.