#3 -  Invest in a combination of stocks (stock funds)
for long-term growth and bonds for stability and income. 

Since the stock market is so unpredictable in the short term, it makes sense for all investors to invest in both.  When corporate profits are soft and inflation is low, bonds can add a boost to your portfolio.  Because bonds often rise in value when stocks are falling, a portfolio that includes both will be far less volatile than an all-stock portfolio.  Bonds, as an asset class, have beaten their stock peers two years in a row.  (CBS Marketwatch 1/2002)  

The top selling mutual fund in 2001, bar none, was Pimco Total Return (PTTAX), raking in $8.1.  This $49 billion bond fund, led by Bill Gross, earned shareholders 9% in 2001 and has averaged an annual return of 7.3% over the last four calendar years, according to Morningstar.com.  (Source:  Craig Tolliver, CBS Marketwatch.com 1/30/2002).

Bond investments are attractive for two key reasons---they provide stable income and they help to smooth out the inevitable fluctuations in the value of your overall investment portfolio.   

Even though investors flocked to bonds during the bear market of 2000 – 2002, few had any real idea of what it was they were investing in.  You should try to understand how they work.  Bonds have their own level of risk and volatility that investors need to be aware of.