I want to continue my 401-K investing course for nurses-and whoever else reads today- by focusing on Bond Mutual Funds.    I have received a few comments, that some don’t understand this investing stuff.

The only way to understand anything, is first to decide it is important.

If being financially solvent when you retire is not important to you, then you need to wake up, and smell the Narcan!

If I am unable to explain it in an understandable manner-then please ask questions.  Remember, the first time someone talked about anaerobic bacteria, you looked at them and said, “Do What?”  So keep reading, and little by little, these terms will gradually mean more to you.

I want to discuss Bond mutual funds today.  Bonds are a term used when corporations borrow money, and promise to pay the money back, over a period of time, with a certain interest rate.  Bond’s can be long term-15-30 years, intermediate, 5-15 years, and short-term-less than 5 years.

Now interest rates tend to be higher, the longer term the bonds. Because the risk something could happen to the company over 30 years is higher than something happening over 5 years-so companies have to pay you more to take that greater risk.  Therefore the interest rate paid on long term bonds is higher.

Now most 401-k plans, don’t have individual company bonds for you to invest in. They usually have a mutual fund that holds a bunch of bonds.  Now, in the past, bond mutual funds, were thought to be more conservative or safer than stocks.  That is, until, a bunch of companies go bankrupt-and bondholders lose usually all of their money.

But a mutual fund  may be holding hundreds of different companies bond, it is unlikely you will lose all your money.  However bond mutual funds are subject to what is called interest rate risk.  This means, that if interest rate rise higher than what the bonds rate was when it was sold, it goes down in value.

If you are holding the bond till its maturity date-which means 30 years if it is a thirty year bond-you are guaranteed the rate it was sold at-so you will have that return on your money.

However, many mutual funds “trade” bonds, this means they sell them to other companies/funds/individuals for the going rate, betting the interest rates will change for the better (for them).  Check out this article on bond funds.

So, this matters to you why????

Well, picking the right bond mutual fund, is important, because some managers do better at the choosing/trading than others.

So when you have a choice between several bond funds, what do you do?  I would look up the fund on Morningstar.com or some other financial website and look at the long-term track record of that fund, compared to its competition.   If it rates high, go for it.  If it rates at the bottom, check out your other options, and pick the best rated one you can.

Many 401-k plans don’t have pure bond funds.  They have funds that are mixed with stocks holdings and bond holdings.  These are good funds, if you don’t want to have to think.

In general, if you are going to use one of these blended funds, the older you are- the higher the bond holdings should be, over the stock portion.

In other words, if you are just 20-you may want 80-90% stock and 10-20% bonds, then when you are 60 just the opposite.  This is because, in general bond funds are less likely to drop as low, in value, in bad times.  So that means less risk- not no risk, just less risk.  But, most experts recommend always keeping some of your retirement holdings in stock, because you need the growth potential-especially if you end up living to age 90 and above, (the chances of which, increase every year!).

When you are older, you don’t have as much time for the stock portion of the fund, to bounce back from it’s losses before you may need the money.  So you decrease your exposure to stocks as you get older, not eliminate, just decrease.

You don’t want to plan to travel in retirement, to find you can only afford to drive to the mailbox-to see how bad your stocks are doing.

So this is the end of our latest version of 401-K 101.  I hope you have enjoyed the show, I mean, post.  Really, I just hope you managed to read this far-only weird people like me like to read about this stuff.

So go forth, and scare the bejesus out of your benefits administrator the next time you get your 401-k report. Ask questions and make good  thought through decisions, rather than just closing your eyes, and picking.

We will continue this discussion another day, after you have had some coffee/tea/Red Bull.