Careful investment is a very important part of good financial planning. As any investment adviser will tell you, a sound investment plan has two parts–risk and stability. Risk always provides higher yield but comes with the higher probability of a loss; stability provides lower yield, but you can be sure that you will get some money.
The most important investments that provide stability are government bonds. Government bonds act as a hedge against riskier market investments. They do not yield as much as stocks, but they have relatively more assurance of a payout.
Not all government bonds offer similar yields and stability. There are two types of government bonds. There are muni or municipal bonds and BAB or Build America Bonds, and investment planners can offer advice about muni bonds vs BAB bonds. There are two types of muni bonds–GO bonds and revenue bonds. GO bonds are for welfare projects like building non-profit institutions (i.e. hospitals). These bonds have a lower yield. Revenue bonds are used to fund for-profit government projects like tollways. These have a higher yield as long as the for-profit project provides good revenue. If it does not, the bond holder stands to lose. Both kinds of muni bonds are exempt from federal capital gains taxes, so these are good vehicles you can use to hedge your investments.
BAB bonds are issued by local or state governments with tax subsidies from the federal government. While muni bonds usually attract domestic investors, foreign investors have a good deal of interest in BAB bonds because of the possibility of a higher yield over longer periods of time.
Whether you invest in one or the other, make sure you know the details of the bonds. For example, muni bonds generally come with a 10 year term, while BABs come with 20 year terms.
