Intelligent investing is all about balance, If you look back at the various model portfolios on pages 79-SO, you’ll notice right away that more conservative the plan, the larger the percentage of bonds, This is because when done carefully, investing in bonds can provide a dependable stream of income and greater price stability, But you need to be careful. The world of bond investing is huge and complex, and it’s easy to get misled. You also have to keep in mind that bonds intrinsically don’t have the ability to grow like stocks do. That’s why my father and I suggest only a few ways to invest in bonds—that will provide you with the diversity you need to balance out the other investments in your portfolio, without taking on undue risk.
If you buy an investment-grade bond and hold it until it comes due, you’re almost guaranteed that you will get your original principal back (plus interest along the way). But trading (or buying and selling prior to maturity) carries other risks. Because the price you pay for a bond depends on the prevailing interest rates (bond prices go up when interest rates go down, and vice versa), you can certainly lose money by buying and selling at the wrong times.
You also have to consider time frames. Some government bonds don’t mature for up to thirty years. (Even though the government stopped issuing new thirty-year Treasury bonds in 2001, many will remain in circulation for years to come.) But even if you have the safety of the U.S. government backing up your investment, just think what the ravages of inflation could do to your investment in thirty yearsl
In my mind (and my father’s), five years may be the ideal time frame. Five-year Treasury notes are safe, provide a steady stream of income, and don’t tie up your money for an unreasonable length of time.