For jittery investors,
U.S. bonds offer 'a place to
put money and be able
to sleep at night'

By Beth Williams
Bloomberg News

NEW YORK -- For investors who can't stop worrying about Asia's financial turmoil and Wall Street's recent choppiness, bonds may be just the tonic to soothe those frayed nerves.

Bonds are "a place to put money and be able to sleep at night," said George Zachar, principal of Greensward Capital, a money management and trading firm in New York. Zachar holds a portion of his investments in tax-free

municipal bonds, and some of his retirement money in zero-coupon Treasury bonds.

Unlike stocks, most bonds offer a steady stream of payments every six months until maturity, at which time investors get all of their principal back -- barring a relatively rare default or early redemption. That's a comfort that can't be provided by stocks, whose returns are less assured.

"Bonds are used to try to mitigate risk," said Robert Klosterman, a certified financial planner and president of White Oaks Wealth Advisors Inc. in Minneapolis.

For many investors, switching to bonds from stocks usually means taking money out of a mutual fund that invests in equities and putting it into one that invests in fixed-income securities -- or a mix of stocks and bonds. In the first nine months of 1997, investors poured $24.1 billion into bond mutual funds, almost twice the $12.6 billion they deposited into these funds in all of 1996, according to the Investment Co. Institute.

Yet individuals looking to invest in bonds have some of the same alternatives open to stock investors. Namely, they can buy individual securities, as they can with stocks, rather than invest in a mutual fund and have bonds chosen for them.

"One of the reasons cited for not using a fund is the lack of control," said Guy Cumbie, of Cumbie Advisory Services, a financial planning practice in Fort Worth, Texas.

The safest of all bonds -- U.S. government securities -- are perhaps the easiest and cheapest to buy, experts say. With the government's Treasury Direct program, individuals can buy securities directly from the government at the time of a debt auction. That way, investors can avoid paying the transaction costs and management fees associated with buying bonds through a broker or investing in a mutual fund. What's more, minimum investment requirements are relatively low.

For individuals, buying Treasuries in this manner is "virtually without question the best way," said Zachar at Greensward.

Through Treasury Direct, investors can invest as little as $1,000 -- the price of a single bond -- in securities due in five years or more; as little as $5,000 in securities due in two to five years, and as little $10,000 in bills due in a year or less. The securities can be bought through regional offices of the Federal Reserve throughout the United States.

The Treasury will send interest payments electronically to a specified account, and reinvest maturing bonds into new Treasuries automatically upon request. Investors can also sell U.S. securities through Treasury Direct for a smaller fee than is required by most brokers.

To buy or sell most other types of debt -- such as higher-yielding corporate bonds or tax-exempt municipal debt --individuals as a rule must go through a discount broker or financial advisor, most of which have minimum investment requirements for bonds.

"Our limits are $10,000 minimum on most fixed-income products we sell," said Paul Siatta, vice president in charge of national sales for Quick & Reilly Group Inc. "Less than that is not going to get a competitive return."

It probably isn't worth investing in individual bonds in amounts less than $50,000 -- or even $100,000 -- through a broker or advisor, experts say, because transaction costs on smaller amounts can erase any returns. What's more, investors with a lot of cash to invest in bonds can diversify their holdings more, helping to minimize risk. That's important when considering investments in securities such as lower-rated, or so-called "junk," bonds, where the risk of default is relatively high.

Some experts advise investors to put cash into bonds of varying maturities. This technique, known as laddering, helps shield the portfolio from swings in interest rates, allowing individuals to reinvest maturing securities at higher yields should rates rise.

Of course, bonds are subject to the same swings in price that stocks are, unless held to maturity. And stocks, though riskier, are still the best bet over time, offering higher returns, experts say. For many individuals who want some holdings in bonds but don't have a lot to invest, mutual funds are still the best way to go. Funds also provide diversification for the small investor, while leaving credit research and trading decisions to professional managers.

Still, for those who want to be assured of having a specific amount of money at a certain time in the future -- say, for college tuition -- or for those who want the surety of semi-annual interest payments and aren't concerned about price swings, buying individual bonds and holding them to maturity makes sense, say some financial planners.

"If all you care about is income and you don't care about the fluctuating principal, you should buy bonds as long as you can and hold them," said Ray Ferrara, a certified financial planner at ProVise Management Group in Clearwater, Fla.