Bonds 101: A Refresher Course
In 1999, stocks were up, investors were chasing dot.com stocks, and investing in bonds was not the thing to do. 
This year's a different story.

Investors who included fixed income investments (bonds) in their retirement portfolios are patting themselves on the back. Bonds are up almost 8% for the year¹, while the two most watched stock indexes, the NASDAQ² and the S&P 500³, are down -27% and -8% respectively⁴.

If you haven’t thought about including bonds in your retirement portfolio for a while, here’s a quick review of what they are and how they can work to diversify your portfolio.

Bonds indeed play an important role in an investor’s retirement strategy through diversification. By combining bonds with stocks, the overall volatility of your portfolio may be reduced.

When you purchase a bond, you are actually loaning money to government agencies, municipalities or corporations, so they can raise money to fund special projects like new schools or museums, fund highway projects or corporate expansion. The borrower receives the cash it needs while you, the lender, earn interest for the term of the loan.

Similar to stocks, bonds can be bought and sold in the open market. Individual bond prices may fluctuate, but as long as the bond is held to maturity, and the bond issuer has not defaulted, the original price of the bond will be repaid. If you decide to sell your bond prior to maturity date, your bond’s market value, or yield, will vary due to fluctuation in interest rates. When interest rates go up, bond prices generally go down, and vice versa.

Stocks and bonds may behave differently from one another, going up and down in separate cycles and to varying degrees. Consequently, combining stocks and bonds takes a middle road through the highs and lows of market performance. This gives the money in your retirement plan an opportunity to grow with potentially fewer fluctuations along the way. Diversification isn’t a free ride, however. While some of your investments may be growing, others may be holding or losing value. You may not make a killing with a highly diversified portfolio, but the idea is not to lose your shorts either. You are giving your savings the potential to grow over time while managing risk.

If you are licking your wounds from negative stock returns, it’s good to remember that there is a way to manage the risk of the stock market.

¹ Lehman Brothers Aggregate Bond Index as of 10/31/00.

² NASDAQ Composite Index: A market capitalization-weighted index of over 5,000 stocks. Because it is weighted by market capitalization, large companies such as Microsoft, Intel, WorldCom, Sun Microsystems, Dell Computer and Oracle dominate the index. The NASDAQ Composite is more a barometer for the technology sector than the broader market.

³ S&P 500 Stock Index: An index, with dividends reinvested, of 500 issues representative of the US large capitalization securities market.

⁴ NASDAQ and S&P percentages given from Bloomberg World Equities Indices as of 11/13/00.

Standard & Poor's (S&P) Corporation is the owner of the trademarks, service marks, and copyrights related to their respective indexes.

Indexes are unmanaged and can not be invested in directly.

As you make decisions on how to invest your rollover money, review the RussellLINK educational information and tools to help you determine what investments are best suited for your level of risk tolerance. Click on the Tools section of RussellLINK to read more about asset allocation and to take an interactive risk quiz.

Copyright © Frank Russell Company 2003. All rights reserved. Important Legal Information Date of first use 12/06/00.

This is a publication of Frank Russell Company. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Frank Russell Company. Frank Russell Company, a Washington, USA, corporation, operates through subsidiaries worldwide.

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