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You'll find a variety of opportunities to diversify across
different credit qualities and maturities. Here are a few points
to consider before determining which bonds may help you
reach your goals.
Credit quality indicates safety of principal.As an investor, you'll want to know the average credit quality of a bond or bond fund before you invest. Basically, there are two categories:Investment-grade bonds are considered appropriate for investors who are seeking to maintain a relatively high level of credit quality. These are bonds with a Baa rating or higher by Moody's or BBB or higher by Standard & Poor's. Generally, investment-grade bonds are used to help reduce portfolio volatility and generate income potential. Speculative (junk) bonds are appropriate only for investors who are willing to accept higher risk and volatility for a potentially higher return. These are generally corporate bonds with ratings below Ba by Moody's and below BB by Standard & Poor's.
Maturity determines price and years of income.
This is where interest rates enter into the equation. Bond prices are affected by the current and anticipated movement of interest rates. Why? Because you buy a bond at a specified rate of interest that does not change. If a bond is paying more interest than is available elsewhere, you, as an investor, will be willing to pay more for it. If the bond is paying less, the reverse is true.
Identify your bond fund category.A bond fund style finder box shows where a bond fund falls in the spectrum. Note that a bond fund has different criteria than a stock fund. However, like the stock fund style finder box, the more completely filled the box is, the more diversified the portfolio is. If your bond holdings are overly concentrated in just one or two boxes, you may not be properly diversified.
Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses. Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. In general, when interest rates rise, bond values fall and investors may lose principal value. Some funds, including nondiversified funds and funds investing in foreign investments, high-yield bonds, small- and mid- cap stocks, and/or more volatile segments of the economy, entail additional risk and may not be appropriate for all investors. Consult a fund's prospectus for additional information on these and other risks. |
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