Navigating today's low—yield world of government, municipal, and corporate bonds can be tricky—but don't feel overwhelmed. Here's how to be a smart investor.

Think Short-Term

Put simply, the longer the term of the bonds you own, the more risk you are taking. That's because when interest rates rise, bond values fall. The longer the bond's term, the more the value can fall. Right now we have very low rates-so low that, when you look at the big picture, the only direction they can really go is up. That may not happen this year, or next-a lot depends on our economy. But the likelihood is that rates will rise. So it makes no sense to invest in bonds with maturities longer than five to seven years.

Focus on Bonds, Not Bond Funds

When you own a bond directly, you know that if you hold it until its maturity date, you will get 100 percent of your principal back. That's not true with a bond fund, which is made up of many different bonds that can be bought or sold by a portfolio manager. If you do invest in bond funds as part of your 401(k), be careful to stick to short-term funds or a stable-value fund. (This is a type of fixed-income fund that generally pays more than a money market but aims to always preserve your principal.)

Get Informed

Investing on your own doesn't take gobs of money, but it does take some time to educate yourself. Visit TreasuryDirect.gov for detailed information on savings bonds, treasury bonds, and other government-issued securities. I recommend checking out treasury inflation-protected securities (TIPS) and the I savings bonds. Both of these government issues are designed to keep pace with inflation. Having at least some portion of your investments insulated from inflation makes a lot of sense.

More Ways to Be A Smart Investor
From the April 2012 issue of O, The Oprah Magazine

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