Stock Market

Bonds are definitely safer than stocks ... unless you are in a period of high inflation, that is. When the cost of living is going up rapidly, an all-bond portfolio carries a wipeout risk that makes the gyrations of the stock market look mild.

In 1971, for example, the year-end yield on long-term government bonds was just below 6 percent. Say you invested your entire net worth$100,000in these fixed-income securities at that time in order to generate current income. That year, inflation was running at 3.36 percent making your real return 2.64 percent.

By the end of the decade, nearly 60 percent of the real purchasing power of your initial investment had been obliterated! To add insult to injury, the $6,000 you received in interest income each year now only buys you the equivalent of $2,409 worth of goods and services. Although your portfolio still has $100,000 worth of bonds paying you $6,000 per annum, the true economic net worth would be less than it was when you began investing; a terrific tragedy.

Instead you'd much rather own shares of outstanding corporations. Why? A good enterprise is capable of passing on cost increases to the customer in the form of a higher