Investors' Corner: Investing in Bonds

By John P. Aellen

In general, investors who want to maximize the growth potential of their assets don't think about adding bonds to their portfolios. However, in times of market volatility, many of these same investors seek a combination offering a higher degree of stability and performance in their investments. Such a combination can be achieved with the purchase of individual bonds.

Bonds have traditionally been considered income-producing investments. You buy a bond, hold it to maturity, and receive regular interest payments every six months or year. Then you get the principal back when the bond matures.

For the most part, bonds appeal to investors who are looking for steady income and don't want to risk losing their principal investment. But bonds have a place in virtually every investor's portfolio. A portfolio of both stocks, to help combat the erosive effects of inflation, and bonds, to provide income and offset any stock losses with bond interest, can work for many investors. The key, however, is to determine what percentage and what type of bonds to own based on your personal financial needs, investment objectives and tolerance for risk.

Investors in their twenties have more time to ride out the market's ups and downs and can generally afford to allocate a large portion of their assets to equities. Some may even allocate up to 100 percent to equities as historically stocks have outperformed income-oriented investments like bonds over the long term, although with greater volatility. As they age, however, many investors adjust the allocation in their portfolios according to their tolerance for risk and reliance on investment income---gradually adding bonds---to enhance the portfolio's yield potential.

Of course, finding and maintaining the right investment mix, one that balances both risk and reward, is a complex process further complicated by the array of choices-bonds are issued with varying maturity dates by corporations, the U.S. Treasury, municipalities, and federal, state and local government agencies. Therefore, it may be wise to seek the assistance of an experienced financial advisor before you invest.

John Aellen is a financial advisor of Legg Mason Wood Walker, Inc., a securities brokerage and financial services firm and member of the New York Stock Exchange, Inc. and SIPC. For more information, please contact him directly at 1-800-837-5833; ext. 5722 or jaellen@leggmason.com.