Bonds or bond funds?
Q. Is it better to invest in bonds or bond mutual funds? — P.L., Norwich, Connecticut
A. First, understand that long-term dollars are likely to grow faster in stocks than in bonds. Still, it can make sense to include some bonds in your portfolio for diversification’s sake, or because you’re in or approaching retirement and looking for less volatile investments.
All bonds are not alike, though. U.S. government-issued bonds are safest, but will generally offer lower interest rates than corporate bonds. The highest rates are offered by “junk bonds,” so called because they have a greater risk of default.
If you buy a 10-year U.S. Treasury note with a 3.4% interest rate, you’ll know exactly what to expect from it. A $10,000 bond paying 3.4% over 10 years will pay you $340 each year — after which you’ll get your $10,000 back. If you sell the bond before the 10 years are up, you might receive more or less than the $10,000, depending on prevailing interest rates.
Bond mutual funds, often called “fixed-income” funds, can be more volatile. They offer instant diversification across the multiple bonds they hold, but the income they generate will fluctuate along with interest rate changes and with changes in holdings as the fund’s manager buys and sells various bonds. Bond funds charge fees, too, though some are quite low.
Q. Where can I find company earnings reports? — A.N., Elkhart, Indiana
A. Try typing the company’s name and “earnings” into a search engine. Or, head to the Securities and Exchange Commission website at SEC.gov, and click on “Filings.” To keep up with your holdings, review their 10-Q (quarterly) and 10-K (annual) reports.
Peter Lynch rules To become a better investor, learn from the greats. One of the most successful stock investors ever is Peter Lynch, who managed Fidelity’s Magellan Fund between 1977 and 1990 before retiring at age 46. The fund grew in value per share by an amazing 2,700% during his tenure. That’s more than 29% annually, on average.
Lynch has written several classic investment books offering great advice. Here are some of his “20 golden rules” from “One Up on Wall Street: How
To Use What You Already Know To Make Money in the Market” (Simon & Schuster, $19):
”Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.” And actually, when the stock market tanks, that’s a great time to be buying stocks.
”Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100% correlation ... it pays to be patient, and to own successful companies.”
”Know what you own and why you own it.”
”If you don’t study any companies, you have the same chance of success buying stocks as you do in a poker game if you bet without looking at your cards.” However, if you don’t have the time or skill to study companies, you can invest in the stock market by just parking long-term money in one or more low-fee index funds, such as those that track the S&P 500 or the broader market.
”Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.”