Interesting investment options
By Alan Lavine/ On Investing
Sunday, May 30, 2004

Interest rates are rising. Since bond prices and interest rates move in opposite directions, bond prices are dropping.
How to handle the situation?
Some options:
Invest in money funds. Money funds own certificates of deposit, Treasury bills and commercial paper, which is corporate debt that typically matures in 90 days or less. These funds' managers can roll maturing investments over at higher rates quickly.
The funds also keep their share price at $1, so you shouldn't lose principal.
Create your own type of money fund. Invest in three-month, federally insured CDs and keep rolling them over at higher rates.
Dollar cost average into bond funds. Invest regularly and you accumulate shares at lower prices.
Interest rates go in cycles. When the economy heats up (as it's doing today), rates rise. But when the economy slows, rates fall.
Over the long term, the average cost of your shares should be lower than the market price when you sell.
Don't need the income from you bond fund? Be sure to have your income automatically reinvested.
Ladder your investments. Invest in bonds, CDs or other notes that mature in different years.
For example, you might buy bonds or CDs that mature in, say one to five years.
Every year when one matures, roll it over into another investment maturing in five years or at the upper end of your ladder. This way, you roll money over at higher rates.
Target your investments. Say you need $100,000 to add to your retirement stash in 10 years.
You could buy a zero-coupon U.S. Treasury bond that matures in 2014. That investment currently yields about 5.25 percent. If you don't sell it, you'll collect principal and accumulated interest.
Today, you can invest just $58,000 in a zero-coupon Treasury bond and collect $100,000 when it matures in 2014.
Keep the investment in a tax-deferred retirement account and the money grows tax-free until you take distribution.
But keep your eyes open. As rates move higher, bond prices should drop even more, making this targeted buy-and-hold strategy even better.
Hedge. The ProFunds group of mutual funds sells a ``rising-rate'' mutual fund. This fund performs best when interest rates rise and bond price fall.