Departments: Money
What About Bonds?

Q: Do I need bonds in my portfolio?

A: Excellent question. Traditionalists would say yes. But I'm not so sure.

Bonds provide a couple of different things for your portfolio. The two most important are income and balance. Let's start with balance. Bonds can provide balance for a stock portfolio because stocks and bonds tend to perform well in different types of market environments.

Young and middle-aged investors who plan to invest for the long term for goals like retirement and college for their children should be invested primarily in growth investments, which are stocks. Stocks provide a higher return over the long term. But they can be volatile in the short term.

That's where bonds come in. Bonds provide a lower, but more stable, return. Many financial planners say that such investors need bonds to balance the stocks, to provide diversification or proper asset allocation.

The traditional asset allocation is 60 percent stocks, 40 percent bonds. In fact, that's the default allocation for most planners.

For many Americans, though, that's too much in bonds. This allocation can put too much of a drag on a long-term portfolio. It's possible to diversify by investing in different types of stocks-large company, small company, international-and by leaving a portion of your portfolio in cash.

Cash is stable. Bonds are not. Bonds can be nearly as volatile as stocks when interest rates change rapidly.

Cash provides the additional advantage of flexibility. With a portion of your portfolio in cash, you can move into the stock market gradually or to take advantage of a dip in the market.

Now let's look at income, the second reason to buy bonds. The issuer of a bond agrees to pay a specific rate of interest, which provides the bond holder with income much like a bank certificate of deposit.

Retirees who are living off their investments may well need some income. The argument for bonds is strongest for them. Even so, these retirees should think carefully about bonds.

People are retiring earlier and living longer. Many will live for 30 or 40 years in retirement. They need stocks to provide growth and to beat inflation. Retirees who can leave a good chunk of money in stocks will have more money to live on. Money that you will not need for living expenses for three years or more is a good candidate for the stock market.

Blue-chip stocks like those in the Standard & Poor's 500 Index are good candidates. A convenient way to buy them is in an index fund like the Vanguard Index 500 Trust.

More aggressive retirees might consider the Nasdaq 100, which represents the 100 largest non-financial stocks that trade on the over-the-counter market.

This index, which can be purchased on the American Stock Index, is very tech heavy, with companies like Microsoft, Intel, Sun, and Cisco but also fast-growing retailers like Staples, Starbucks, and Bed, Bath & Beyond.

Stocks that pay high dividends provide another option for retirees. Equity-income funds typically contain such stocks. Most large fund companies sponsor one. They include Vanguard Equity Income, Fidelity Equity Income, and T. Rowe Price Equity income. Other income-producing funds include Vanguard/Wellington and Vanguard/Wellesley Income.

Q: I plan to get married. How can we get started on the right foot with our finances?

A: The first thing you need to do is talk over your goals before you get married. What is your dearest dream? Do you want children? When would you like to retire? What is the one vacation you would regret not taking? Do you want to go back to school? What is the one thing that you've always hoped to have in your home?

Talk, too, about what's a fair amount for each partner to spend on his or her own and which goals you will save for together.

Before you get married, get out of debt. Both of you. You don't want to start out your life together with a millstone around your neck.

Build a good credit record as a couple. Two credit cards is enough. Three at the most. Make sure you each have credit in your own name. And then pay the cards off every month.

Pay yourself first. Set up an automatic investment account to save and invest money each month either in a mutual fund or stock. The best way to get started is with a 403 (b) or a 401 (k) plan at work. Be certain you invest enough to capture your employer's match if there is one.

Set up Roth IRAs. These accounts are great for young people. You pay tax on the money before you put it in, but you never pay tax on the earnings. Each of you can contribute $2,000 a year to a Roth. And you can take money out, to buy a home, for example.

--Mary Rowland

Rowland is an author and regular contributor to financial planning magazines.

Thrifty Educator

Each month, NEA Today prints money-saving tips from NEA members. This month's tips come from Diane Postman, dpostman@pps.poquoson.k12.va.us, a kindergarten teacher at Poquoson Primary School in Poquoson, Virginia, and from Betty Darr, darrmt@cyberport.net, a first grade teacher at Swan River School in Bigfork, Montana:

Diane Postman: Many teachers write a daily morning message for their students. Though I find it a wonderful teaching tool, I was concerned about wasting paper (and the cost), so I laminated five sheets of chart paper. I write my daily message on these sheets using markers that will erase. I have a variety of colors so I can use a different color to emphasize letters or words that I want to focus on.

Sometimes I allow my kids to fill in missing words or circle words that they can read. They love being given the pen to write with! I can do a week's worth of letters, and, at the end of the week, I just wipe them off using a damp sponge. When doing this, be sure to wear rubber gloves or your hands will end up being the colors of your pens!

Betty Darr: One tip I have found helpful is to use cereal boxes as "take-home" containers attached to the desks of each student. When I send my letter to students and parents in the summer, I ask them to bring a cereal box. The students decorate the boxes at home and bring them in the first day of school. I attach these to the desks using strapping tape. When I am given a note from the office to send home, I don't have to remember to hand it out at the end of the day. When we finish a paper together that I want sent home, the students put it right into their take-home box and it doesn't get "swallowed up" in the desk.

Heads Up from NEA Member Benefits

On January 19, 2000, Nationwide Financial Services announced a change in the focus of Nationwide Retirement Solutions, the Nationwide subsidiary that markets the NEA Valuebuilder® Programs to NEA members. As a result, Nationwide will relinquish its role as the distributor for the NEA Value- builder® Annuity and Mutual Fund Programs effective July 2000.

Though NEA's current relationship with Nationwide extends through July, Nationwide has terminated the Valuebuilder® sales force. As a result, effective March 31, 2000, the Valuebuilder® financial services representatives are no longer available.

NEA members may continue to contribute to their accounts and receive ongoing investment advice through the toll-free Nationwide Financial Customer Service Center in Columbus, Ohio. Or members can access their accounts through the NEA Member Benefits Web site at www.neamb.com.

In February, NEA Member Benefits and Nationwide mailed a joint communication to all NEA Valuebuilder® participants, assuring them that the Valuebuilder® Programs are safe. Members were cautioned that withdrawing funds from an annuity prematurely could result in penalties and fees.

NEA Member Benefits expects to present a recommendation for sponsorship of a new Valuebuilder® distributor to the NEA Board of Directors by September 2000.

Call NEA Member Benefits at 800/637-4636 about the status of the NEA Valuebuilder® Programs. For individual Valuebuilder accounts, call the Nation-wide Customer Service Center at 888/333-5610.