Buying 100 to 1,000 shares of a stock, or pumping $1,000 to $2,500 into one or two bond issues, is eight times riskier than investing in stocks and bonds through mutual funds. Buying individual stocks and bonds also means paying commissions. You pay no commissions by using one of the more than 300 no-load mutual funds you will learn about later.
Never invest in bods when interest rates are rising
Bonds are good investments only when they are appreciating due to declining interest rates. When the prime rate is rising, any long-term bond will lose 10% of its principal value for every 1% increase in the prime rate. From March 1987 to October 1987, while the prime rate rose from 71/2% to 91/4%, bond investments dropped 10% to 20% in value. Stay away from financial advisers who tell you bonds are always a good safe investment for those who want income.
Bond investments include:
- Individual Bonds—corporate, tax exempt, zero coupon, GNMAs
- Bond Mutual Funds—high yield, fixed income, government securities