Word: bond
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...boss's boss, fire fighters and forest volunteers, all uncowed by public anger, standing by a friend who they said had made an unthinkable mistake. The judge denied the government's request to lock her up without bail; if she manages to raise 10% of her $600,000 bond, she can await trial in a halfway house...
That's what bonds are for. Unlike stocks, which are primarily a bet on tomorrow's growth, bonds provide a stream of income today and tomorrow. As its name implies, a bond is also a kind of contract that commits the borrower to give you all your money back down the road. So bonds, unlike stocks, almost never go to zero, making them the ultimate trust-no-one investment. What's more, they can provide ballast for a sinking stock portfolio. "Bonds have actually outperformed stocks over the last five years," points out portfolio manager Ian McKinnon of the Vanguard...
Interest rates may look like chicken feed right now--but inflation is low too, so your real return is richer than it looks. Even when bonds yielded 8% in the early 1990s, their return after inflation was under the 3.2% you can net on today's 4.8% bonds (see chart). That's why you shouldn't join the herd of investors stampeding into high-yield--or junk-bond--funds; so far this year, the public has poured $9 billion into these buckets of risky corporate debt, nearly half as much as the money attracted by all stock funds combined last...
Instead, consider TIPS, or inflation-protected Treasury bonds. Uncle Sam isn't going to default on his debt (or, if he does, the world economy will be such a mess that nothing else will be worth investing in either). And TIPS guarantee you can't lose money after inflation. They're no longer cheap but still yield up to 3.1 percentage points over the current inflation rate. Put them in your IRA or other retirement account, where their quirky tax features won't "drive you stark raving mad," as Loomis Sayles Bond Fund manager Daniel Fuss puts...
Finally, to squeeze more income out of your short-term assets, consider my nominee for America's most underrated investment: preferred shares of closed-end municipal-bond funds. The dividends on these shares, available from firms such as Nuveen, Merrill Lynch and Morgan Stanley, are generally exempt from federal income tax and some states' income tax as well. For more details, go to etfconnect.com and under MULTIFUND SEARCH, choose PREFERREDS and select FIXED INCOME--MUNICIPAL...