Un Mesaje de Garcia / A Message from Garcia

Hay House

Chapter One

The Bare Essentials

* A balanced portfolio of stocks and bonds can help most investors accomplish long-term investment goals more effectively than a pure equity strategy.

* Bonds provide solutions for two of the three most basic investment requirements: income and capital preservation.

* A bond is a security that pays a specified rate of interest for a limited amount of time and returns principal on a defined date.

Despite the diversity and breadth of today's media, the stock market inevitably dominates business news. You'd think there was nothing else to talk about. To be sure, the bond market occasionally takes center stage- usually when the Federal Reserve is about to make an announcement or when inflation concerns suddenly begin to percolate-but for the most part that's the exception, not the rule.

Of course, the motivations of news editors are easy to decipher. Much like homicides and natural disasters, the stock market simply generates better headlines than the sleepy bond market. I guess it's because all the elements of suspense are there, with quick fortunes made (and lost) more often in stocks than in bonds. Frankly, I'd be hard pressed to disagree-stocks are more newsworthy than bonds. So I'm not going to waste your time arguing to the contrary. But consider this: after the dramatic stock market decline that began in 2000, bonds outperformed equities for three years in a row. Now that's newsworthy.

I would also contend that a balanced portfolio of stocks and bonds can help most of you accomplish long-term investment goals more effectively than a pure equity strategy. This is not an original idea. With rare exception, stocks and bonds represent the two largest components of the three main asset classes recommended by most investment firms (the other would be cash). Consequently, the question is not whether you should own stocks or bonds, but how much of your investment portfolio should be allocated to each asset class.

You see, bonds provide solutions for two of the three most basic investment requirements: Income and capital preservation. The other objective, growth, is more appropriately achieved through stock investing. That's why stocks and bonds complement each other so well. Together, your bases are covered.

But we're getting a little ahead of ourselves here. Now that you understand some of the most compelling reasons why bonds are important, let's take a step back and briefly discuss what they are. Ironically, the best way to do this is to forget about bonds for a moment and instead think about what happens when you purchase a home. A loan officer informs you that the bank would be happy to lend you money as long as you promise to repay it in 15 or 30 years. Suppose you settle on a 30-year term. That's fine, but there's one more important caveat-it'll cost you, say, 6.75 percent annual interest for the privilege. It seems fair, so you sign the loan agreement.

It's the same scenario when you purchase a bond, except you're the bank, so you're making the loan. And as the bank, you expect borrowers to repay loans by a specific date and at an agreed-upon rate of interest. That's how bonds work. In other words, as a bondholder, your purchase is effectively a loan that will be repaid after a certain length of time and, during the life of the loan, you'll be paid a fixed rate of interest. That's why bonds are also known as fixed-income securities.

Continues...

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Excerpted from Un Mesaje de Garcia / A Message from Garcia by Charles Patrick Garcia Copyright © 2003 by Charles Patrick Garcia. Excerpted by permission.
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