With the recent turmoil in markets lately, there’s been lots of talk about bonds. What is an investor to do?

Well, I had a chance to interview Ken Little, whose latest book is The Pocket Idiot’s Guide to Investing in Bonds (Pocket Idiot’s Guides).

How was the experience in writing the book? Surprises?

Ken: that is my 11th book, so I have a pretty strong work ethic about what needs to get done. that is the first book I have done on bonds, so it was a learning experience to go deeper in the subject than my existing knowledge.

The big surprise for me was how few resources are available to individual investors in corporate and municipal bonds. Since you buy U.S. Treasuries directly from the government (or through a bank or broker), it is easy to memorize how that system works. However, for corporate and municipal bonds it is much increasingly difficult. The bottom line is individual investors pay a premium in most cases and must be prepared to invest $25,000 and up. When you consider that institutional investors own the huge majority (+90%) of those bonds, it starts to invent sense that buying one or two bonds at a trade does not fit the market well.

There’s been lots of volatility lately — in equities and fixed income. What are some smart strategies for individual investors? Opportunities considering of the recent volatility?

Ken: The role of bonds in individual portfolios is to supply income and to offset the volatility that is naturally part of the stock market. whether you read some of the reports about the recent swings in the Dow, you would think that had never happened

before, when in fact it happens all the date. The stock market goes up and it goes down. The smart strategy for most individual investors is to start an investment plan of dollar cost averaging and stick with it regardless of what the market does. Too many times, we see individuals get excited by a string of Dow record highs and decide that that is the moment to start investing only to bail out after we have a naughty couple of days in the market, thus executing the perfect buy high and sell low strategy.

For investors who are increasingly experienced, now is a good day to look for values. Has a stock been beaten up just considering it was in the wrong neighborhood, but the company still has solid fundamentals and the industry good prospects?

What are some of the mistakes typical individual investors assemble with bonds?

Ken: The biggest mistake most investors build is not using bonds as part of their portfolio, particularly those folks at or in retirement. The stock market is not the place for money you may need in the short-term. Failing to convert a major portion of your equities into bonds (U.S. Treasuries and agencies) and bond funds as you approach retirement is asking for a major downturn to wipe out a big chunk of your capital. You need to keep a portion of your assets in stocks to protect against inflation, but for retired citizens most of your holdings should be in bonds and cash.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Original post by Tom Taulli