Managing Your Money : INVESTING : They Aren’t Sexy, But You Still Need Bonds : The investor may be tempted to ignore the bond market as the economy pulls out of the recession. Don’t.

If you want to get rich, buy stocks. Once you are rich, buy bonds.

That’s a simple maxim, but it’s sound advice for small investors mulling how to construct a diversified investment plan for the 1990s.

Bonds--those basically boring, interest-paying IOUs from companies or government--belong in most investors’ portfolios, even those of investors in their 30s.

But don’t make the mistake of believing that bonds are wealth-building investments, financial advisers warn. “They’re really more a way to preserve capital than build it,” says Kurt Brouwer at the San Francisco money management firm of Brouwer & Janachowski.

True, bonds have been tremendous growth vehicles recently. The average bond mutual fund gained 65% in the five years ended Sept. 30, versus a 45% return for the average stock fund, according to Lipper Analytical Services.

But much of bonds’ gain was courtesy of falling interest rates, which instantly make older, higher-yielding bonds worth more on paper--essentially gravy for their owners, over and above the fixed interest they earn.

That’s great, but today, with the economy nearer to recovery than recession, interest rates are unlikely to fall much more. That means the best that bond owners can expect in the years ahead is to collect their annual interest, typically 5% to 8% depending on the type of bond and its term, or maturity. After inflation, it’s not much.

And at worst, if interest rates rise, older bonds will depreciate, chipping away your net return.

All of which may tempt you to simply ignore bonds in the ‘90s and keep all your financial assets in stocks. Don’t. Here’s why:

* Wealth needs protection. The younger you are, the more your portfolio should be tilted toward stocks for long-term appreciation--because only stocks let you share in the economy’s growth.

But stocks can also swing wildly, and if you pick wrong you can lose every penny. The older you get, the less time is left to make up for mistakes. So it’s wise to shift more of your accumulated wealth over time toward bonds, which normally are more stable investments.

“Bonds provide an ideal offset to stocks’ volatility,” says Theresa Havell, director of fixed-income investing at money manager Neuberger & Berman in New York.

* “Real” bond yields are high. Interest rates have dropped a lot since 1982, but then so has inflation--which is the bond investor’s bogey.

Historically, bond investors have expected to earn one percentage point over the prevailing inflation rate, to preserve their money’s purchasing power. Since the early 1980s, however, investors have demanded much higher real returns, as paranoia about 1970s-style inflation has remained almost absurdly intense.

Result: A seven-year U.S. Treasury note pays about 6.5% today, while inflation runs about 3% annually. That gives you a “real” (after-inflation) yield of 3.5 points.

So something good did come out of the ‘70s, Havell notes: “The bond market has become much more generous.”

Now, how to decide how much to invest in bonds, and what kind?

In your 30s and 40s, maybe 20% to 30% of your financial assets belong in bonds, the rest in stocks, many experts say. As you age, the bond percentage should rise, the stock share should fall. All along, the less risk you’re willing to take with your wealth, the better bonds should look.

One easy way to create a bond portfolio is to invest equal amounts in Treasury securities maturing each year for the next five years, Havell suggests. That way, you’ll have 20% of your bond capital to reinvest annually--a good hedge if interest rates begin to rise.

You could do the same with bank savings certificates, but note: The allure of Treasuries over CDs is that Treasury interest isn’t taxable by the state (though you’ll still owe federal income tax).

Even simpler for most investors are bond mutual funds, which let you reinvest interest earnings automatically in more fund shares. That’s important for younger investors who don’t want or need interest income to spend.

Bond funds are available in more flavors than ice cream, but the choices needn’t confuse. Rather than wrack your brain trying to decide among Treasury, mortgage, corporate, foreign or municipal bond funds, you could make it easy on yourself by picking three different types. Most major mutual fund companies offer all, and some offer funds that mix bonds for you.

The key is to stick with funds whose bonds mature on average in the three- to seven-year range, both Brouwer and Havell advise. Typically, that means you’ll be asking a fund company for “intermediate-term” bond funds.

Why those? Longer-term bonds pay more, but not enough to compensate for the added risk of going that far out on the limb, many bond analysts argue.

Indeed, since 1926, according to Ibbotson Associates, a Chicago firm that tracks these things, long-term U.S. bonds have generated a compound total annual return of 4.8%. Intermediate ones generated 5.1%. Over all those years, that difference really adds up.