Creating a Winning Bond Strategy

With the right approach, bonds can achieve outstanding returns in a volatile market.Here's how.

to rising rates. But she’s done it all through mutual funds.

“I know there will be a point when I won’t be working as much, and I don’t want to compromise my lifestyle one bit,” Ginn says. “Bond funds will help me do that.”

Individual bonds certainly have their merits. If you plan to hold them until maturity, price fluctuations don’t matter. The amount you invest is the amount you’ll receive when the bond comes due. Mutual funds, however, price their bonds daily. So when interest rates rise, their returns are likely to suffer. With individual bonds, you won’t pay the 1.14% management fee that the average bond fund charges. But remember, just as you wouldn’t buy one or two stocks and call your portfolio complete, you should have enough diversification so that if one bond defaults, it won’t be your portfolio’s undoing. Given how expensive it is to buy individual bonds, it’s almost impossible to put together a diversified portfolio for less than $100,000.

One exception is Treasury bills. They’re simple to buy directly from the Treasury Department in increments of $1,000 and, since it’s the world’s best quality bond, there’s no credit risk. Go to www.publicdebt.treas.gov to find auctions.

If you’re looking for just one all-weather bond fund, try Harbor Bond Fund (800-422-1050). It has a 6.6% three-year annualized rate of return and is managed by Bill Gross, who is considered to be the best bond investor in the world. It’s a virtual clone of Gross’ flagship PIMCO Total Return Bond Fund, without the sales charge.

Karen Ellis’ portfolio

  • 10% Ultrashort corporate bonds Scudder Preservation Plus Income
  • 22% Intermediate government bonds American Century Inflation-Adjusted Bond and Dimensional Intermediate Government Fixed-Income Fund
  • 18% Intermediate corporate bonds Calamos Convertible Bond and Calvert Income
  • 23% International bonds Oppenheimer International Bond and Payden Emerging Markets Bond
  • 27% High-Yield California Baptist Foundation church bonds

40% of Ellis’ overall portfolio is in bonds.
One maturing in 2007 yielding 6.3% and another maturing in 2011 yielding 7.8%

G.G. Washington’s portfolio

  • 56%Bond Ladder Various corporate bonds
  • 15%Foreign and domestic bonds PIMCO Diversified Income Fund
  • 15%Floating rate bondsPIMCO Floating Income
  • 14%Intermediate bonds PIMCO Total Return

35% of Washington’s overall portfolio is in bonds.

Donna Ginn’s portfolio

  • 40%Intermediate bondsT. Rowe Price Spectrum Income
  • 20%Floating-rate bondsING Senior Income Fund
  • 20%Long government bondsPIMCO Real Return
  • 20%Short bondsScudder Preservation Plus Income Fund

40% of Ginn’s overall portfolio is in bonds.

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