Steadier as You Go

Though the Markets Move, Bond Investments Stay on Course. Here's Why.

Many investors watched in gut-wrenching shock as the stock market plunged on Feb. 27, afraid the decline might mark the start of a crash that would wipe out their savings.

Not Robert Youker. The retired World Bank employee's holdings in ultra-safe Treasury securities scored big gains that day while the Dow Jones industrial average tumbled more than 400 points.

"It didn't bother me at all," Youker, 73, of Bethesda, said of the Dow's drop. "I have a lot more money in bonds than in stocks . . . I don't worry at all about the stock market."

Youker's serenity is what many small investors pay for when they buy traditional bonds. Assets that are steadier, stodgier and less flashy than stocks but also less risky. Smaller returns on average over time but fewer stomach-churning ups and downs.

And with the stock market turning choppy in recent weeks, many individual investors are looking for alternatives. The bond market -- with its arcane vocabulary, esoteric products and legendary machismo -- can be intimidating. But anyone with an Internet connection and some patience can see that it's also getting easier for individuals to learn about and invest in bonds. Web sites have proliferated offering glossaries, research and technical help for those who want to get started.

A bond is essentially an IOU. A government or company needs to borrow money. So it sells, or "issues," a bond for a specific amount to investors, promising to repay that amount with interest over a certain time period, on specified terms. Typically, the bond issuer pays only the interest until the end of the period, when the bond "matures" and the original amount, or "principal," is repaid.

For example, say XYZ Co. wants to borrow money to expand its factory. It issues a five-year, $1,000 bond at 4 percent interest. The bond buyer gives XYZ Co. $1,000 and receives $40 in interest each year. At the end of five years, the investor gets back the $1,000 and has gained $200 in interest.

For individual investors, bonds' primary appeal is the guarantee of receiving income plus the original investment back. That, and a simple way to diversify a portfolio by adding something that tends to zig when stocks zag. Like throwing a pair of sensible shoes in the closet alongside the zippy heels.

Bonds can also be bought and sold after they are issued, and their value on the market can change from their price when issued. Many investors hold their bonds until maturity, feeling no effects of price swings. But an investor who has to sell when prices are down will lose money.

Youker, for example, said he lost money when he sold bonds issued by General Motors' finance subsidiary, GMAC. But he is holding on to his Ford bonds, though they have sunk in value as the company's losses have mounted. The Ford bonds pay a relatively good 7 percent interest rate and mature next year, he said.

One of the risks with bonds is that the issuer might default, running out of money to make the payments. The Russian government, for example, defaulted on some of its debt in 1998. Many Internet and telecommunications companies that issued bonds during the tech stock boom defaulted after they went bankrupt.

Among the safest bonds in the world are Treasurys, the securities issued by the Treasury Department to raise money for the federal government. Investors consider them virtually risk-free because a U.S. government default is so unthinkable.