Tips for Bond Shoppers

So you should have bought bonds five months ago, but you didn’t. Now you realize you have all of your savings in very short-term accounts, but you need higher income. Yet you’re afraid of getting whipsawed if you lock into today’s yields.

There’s a simple solution: Build a portfolio in increments over the next six to 12 months, and “ladder” yourself--buy bonds (or bond mutual funds) in equal amounts of short-, intermediate- and longer-term maturities. You can do the same with bank CDs, for that matter. Once you create such a portfolio, stick with it.

The idea is to be diversified enough so that no matter what happens with interest rates, you get some benefit. Investors who took that approach in 1994--instead of owning a single long-term bond fund, for example--probably suffered far less anguish.

Most major mutual fund companies offer short-, intermediate- and longer-term bond portfolios. Many investors prefer to buy funds that own U.S. government bonds, but there also are corporate bond funds (they generally yield more than government funds), GNMA funds (mortgage-backed bonds) and municipal funds (for high-tax-bracket investors who want tax-free income).

Investors who want to own just one fund--and are willing to take more risk--might consider a “flexible” income fund that can invest across the broad spectrum of bonds and maturities. That might include foreign bonds and even stocks. Among the flexible no-load funds rated highest by fund-tracker Morningstar Inc. are Janus Flexible Income, (800) 525-8983; Berwyn Income, (800) 824-2249, and T. Rowe Price Spectrum Income, (800) 638-5660.