When I was a kid growing up in the wilds of central Florida, there was a local TV commercial (OK, so it wasn't that wild) that aired every afternoon between the Leave It to Beaver and Brady Bunch reruns. "Tires ain't pretty," the announcer used to say, "but you still gotta buy 'em!"
Sage advice, that. It's not as though anyone actually wants to spend any of their hard-earned moola on four hunks of rubber and steel, but if you own a car, that transaction is pretty much inevitable. The fleas, as one of my favorite Southern expressions goes, come with the dog.
And if you can believe it, that observation leads me to the topic of bond funds. No, really. As I've written in the past, I'm well aware that when it comes to the swimsuit competition between individual stocks and mutual funds, stocks win out just about every single time. And that's 100% fine by me. When you get right down to it, funds aren't meant to be sexy investments. They won't cause your heart to race when the market soars, but then again, they aren't likely to leave you heartbroken (or just plain broke) when it plummets, either.
Are there exceptions? Well, sure. I wouldn't advise it, but investors are free to plunk down a chunk of change on high-octane sector funds such as Berkshire Focus, which runs with a concentrated portfolio that, among other things, invests significant sums in Internet titans such as Yahoo! (NASDAQ:YHOO), Amazon (NASDAQ:AMZN), and eBay (NASDAQ:EBAY). Communications funds -- which as you'd expect gravitate toward such names as NextelCommunications (NASDAQ:NXTL), Sprint (NYSE:FON), AT&T Wireless Services (NYSE:AWE), and U.S. Cellular (AMEX:USM) -- are also available. They're tailor-made for investors who are just itching to make a bet on the future of that particular (and particularly volatile) industry.
By and large, though, funds don't get by on sex appeal or racy profiles, and that goes triple for those that invest in bonds -- an asset class that sooner or later all of us are probably going to own. After all, as you get closer to retirement or to big near-term goals such as buying a house or funding a child's college education, you'll probably become at least as interested in preserving your nest egg as in growing it. Heck, maybe you're just a big believer in the value of intelligent asset allocation and you've determined that, in light of your investing time frame and/or tolerance for volatility, a portion of your portfolio should be dedicated to steady-as-she-goes, fixed-income investments right now.
With that in mind, I want to wrap up this three-parter on how to fortify your portfolio with a couple of pointers on what to look for when you go bond-fund shopping.
Expenses matter...
And they matter a lot, too. Perhaps even more than they do on the stock side of the ledger. In the buttoned-down world of bond funds, winners and losers are often separated by very slim margins, a dynamic that augments the impact of an always-important competitive advantage: a low price tag.
Crunching the latest numbers from Morningstar, it turns out that the typical "intermediate-term" bond fund runs with an expense ratio of 1.07%. The intermediate-term category is where most of us will want to shop for our biggest fixed-income investment. Therefore, as you do your homework, be sure to look for a pick whose expense ratio comes in under (and preferably well under) that threshold. And while you're doing your research, bear in mind that Vanguard Total Bond Market Index fund -- an intermediate-term offering that checks in with a price tag of just 0.22% -- is always a viable option, at least when it comes time to choose a fund to anchor the fixed-income portion of your portfolio.
... and so does diversification
To be sure, there are plenty of actively managed picks that compete with (and win out over) the Vanguard fund. Indeed, I'll be highlighting my absolute favorite in the upcoming issue of Champion Funds.
But while for my money an intermediate-term bond fund will likely be your best bet for a core holding, I don't think that's the only flavor of bond fund you should own. Just as I am when it comes to stock funds, I'm a big believer in the value of diversifying your fixed-income portfolio. To that end, I think investors should also contemplate picks from the junk-bond category (a badly misunderstood asset class that includes more Champs than you might think) as well as those plucked from international markets.
I tackled junk bond funds in an earlier commentary, and I'll have some pointers for you soon on what to look for when you go shopping down the bond market's international aisle. In the meantime, please stand by for an article on why fixed-income investors should worry a lot less about rising interest rates than the financial media's headline writers would have you believe. To my mind, that's the most overhyped story of 2004.
Shannon Zimmerman , editor and analyst forMotley Fool Champion Funds, doesn't believe the hype,and he doesn't own any companies mentioned above, either. The Motley Fool is investors writing for investors.
