at www.treasurydirect.gov, which will save you the price of a broker’s commission. For individual municipal bonds, the best clearinghouse of information for individual investors can be found on a Website organized by the Securities Industry and Financial Markets _Association, www.investinginbonds.com, or the Bond Market Association, www.bondmarket.com.
But keep in mind that balanced investing is certainly possible for individual investors via mutual funds. While you may not be ready to think about expanding your bond holdings, remember that even within your stock portfolio, you should make sure that you have an appropriate mix of domestic and international, small- and large-cap holdings, and growth and value options.
As you rebalance, keep a long-term outlook in mind. Ultimately, you don’t want to make a change just for the sake of change. If you chose a poorly performing fund, before you unload it, consider if you’re really in a better position to pick a stronger replacement. Your existing fund may still have solid holdings but its overall performance could be suffering from the shocks of a volatile market. Also, don’t lose sight of the transaction costs and tax implications that may come with selling.
But a word of caution: “Effective diversification only works if you don’t chase after each and every trend,” says Frank Paré, a financial adviser with PF Wealth Management Group in Oakland, California. “Instead, pick a weighting for stocks, bonds, and the rest, and stick with it.”
To help you with your portfolio checkup, we worked with Morningstar to identify top-performing mutual funds that offer exposure to a variety of asset classes. Finalists were chosen with the best 10-year record in each category to judge how each fared in both the stock market’s bear and bull cycles. All have managers who’ve been in place for five years or more and charge lower-than-average expenses to keep costs from cutting down returns.
Bonds: A Steady Income
It’s easy to think of the bond market as a diversification starter kit. That’s because fixed-income securities tend to rise in value when stocks fall. Indeed, the factors that slow stock market performance are often welcome news for bond investors. One clear example is that when interest rates rise, investors often flock toward bonds to lock in a solid rate of return.
Bonds are essentially IOUs issued by a government, municipality, or other entity. They return a specified interest rate in the form of regular dividend payments and repay the value of the bond at maturity. All told, bonds offer an attractive stream of steady income, as well as a hedge against a downturn in the stock market.
While bonds issued by a rock-solid creditor, such as the U.S. government, have clear appeal, investors can get an added benefit from municipal bonds, or munis, which are issued by local governments to fund schools, roads, and a host of other projects. The dividend return provided by munis is tax-free. For example, in the case of a bond paying 4.2% interest, an investor in the 33% tax bracket gets an income boost equivalent to 5.6%. There’s