by Archie M. Richards, Jr., CFP^®
April 18, 2005

Most people expect interest rates to rise. I don't. I think interest rates in the long run will continue down. (For the reasons why, see the column dated 2/28/05 in archierichards.com.) But let's say you go along with the majority and expect interest rates to rise. You want to buy bonds, but you know that rising interest rates cause bond prices to fall. What's a good way to go about it?

Ladder your bonds. Assume you're working with $100,000. You'd buy $10,000 of 10-year bonds, $10,000 of 9-year bonds, and so on, down to $10,000 of 1-year bonds.

A year passes, and the 1-year bonds mature. You reinvest the proceeds into 10-year bonds. Again, the bond maturities range from 1 to 10 years.

The prices of the 10-year bonds fluctuate quite a bit. But the prices of the 1-year bonds don't. Since the average maturity is 5 years, the fluctuations of the laddered portfolio are modest. But the interest rate of the whole is higher than that of 1-year bonds.

If interest rates in the economy go up, the interest payments of this portfolio will gradually rise to match.

If you want to own individual bonds with minimum risk in an environment of rising interest rates, laddering is a good way to do it.

At a roulette table, a bet on a single number generally pays 35-to-1. But the odds of winning are only 1-in-37. This gives the house an advantage of about 5 percent. In the long run, you're certain to lose.

But with stocks in the long run, you're certain to win if you just stay in.

Since 1926, there have been 70 ten-year periods (1926-1935, 1927-1936, etc.). After adjusting for inflation, stocks lost money in only two of them - both by less than 1 percent.

Oh yes, stocks are volatile from year to year. Since 1926, the best year for the S&P 500 was 54 percent. The worst was a loss of 43 percent. You have to hang in there. Actually, the chances of big up-years at this time are greater than the chances of big down-years because government economic policies have so much improved from prior decades.

If you're just starting an investment program at age 25, you have a 40-year time horizon for contributing money toward your retirement. Plan on living to age 100, giving you 75 years total.

Make the power of compound earnings work for you. Let's say you invest $100 a week. The money grows at 9 percent a year for 40 years. Bingo, you're worth over $2 million.

Not bad, eh? You don't even have to work at it, at least not much. You just ride on the shoulders of the people of the world. They don't know they're working for you; they're working for themselves and their families. But they're generating wealth all the same. By investing in the stocks of the world, you reap the benefits.

Okay, if you're 25 years old with a growing family, maybe you can't afford $100 a week. Fine, make it $50. After your work becomes more valuable and your income rises, make it $100, $200, $500, $1,000 at a time. It all adds up.

Casino bets are gambles. Long-term stock investments are not.

Since 1978, the federal government has been deeply enmeshed in higher education and the healthcare industry. To both it has provided billions of dollars of subsidies and imposed millions of regulations. Government has been far less involved in the apparel industry and automobile manufacturing.

During the same period - 1978 to the present - college tuitions and healthcare prices have risen about 6 times, while the prices of apparel and new automobiles have risen only 1.7 times.

Here's why: The more government gets involved in an industry, the greater the problems. The more subsidies the government provides, the higher prices rise. In the long run, the actual results of most big-government policies are opposite to the intended results.