MUNICIPAL BONDS LEND MONEY TO CITIES, COUNTIES

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

Municipal bonds finance public projects, such as building or improving schools and hospitals and updating sewer and water systems. Municipal bonds are issued by cities, counties, states and state agencies, and special districts, including school, water and sewer districts.

When you invest in a municipal bond, you loan the bond issuer a set amount of money for a specified amount of time. In return, you receive a stated rate of interest over the life of the bond. When the bond matures, or is called, your original investment is returned.

At first glance, municipal bonds appear to pay less interest than taxable investments. However, all municipal bonds are free from federal taxes, and some are free from state and local taxes as well. As a result, municipal bonds can actually offer higher after-tax returns. For instance, if you're in the 28 percent tax bracket, a taxable bond must earn 6.25 percent to equal the after-tax return of a tax-free bond earning 4.5 percent.

Different bonds offer different levels of investment risk. To help you evaluate the quality of a bond, bonds are rated. In addition, nearly one half of municipal bonds issued today are insured to guarantee timely payment of interest and principal.

You can sell a municipal bond before it matures; however, if interest rates have risen, you may receive less than you originally paid. If you hold a bond to maturity, you will receive exactly what you were originally promised.

Put investment in budget

I just can't seem to save enough money to invest. What do you suggest?

I suggest incorporating an investment plan into your budget. Nearly everyone has some type of budget to which he can add a monthly investment. It doesn't have to be a large amount.

For example, if you invest $50 a month and earn a compounded return of 8 percent annually, you'd accumulate $12,000 to $13,000 in 12 years. Compounded return means you leave your initial investment and any interest it earns alone to earn more interest. This example isn't intended to provide specific returns. Instead, it gives you an idea of how quickly even a small investment can add up.

Here's another approach: Each month, have a set amount automatically deducted from your checking account and invested. Many investment firms and mutual fund companies offer this option. On a set date each month, the company will deduct a set amount from your account and invest it in an investment of your choosing. This money can be invested in a number of different types of investments, including mutual funds and stocks. These monthly transactions are reported on both your bank statements and the statements you receive from the mutual fund or investment firm.

If you participate in a company-sponsored retirement plan, have a set amount deducted from your check each pay period and contributed to the plan. An excellent time to start such a program is when you get a pay raise. If you invest the difference in your paycheck, you'll never get used to spending the extra money, and you'll never miss it.

What is the Dow Jones industrial average?

The Dow Jones industrial average is the oldest and most widely quoted of all market indicators. When people say the market was up or down, they are actually referring to the Dow Jones industrial average.

Charles Dow developed the Dow Jones industrial average in 1884 to provide investors with a market barometer. By watching the DJIA, investors can gauge what the market as a whole might do.

Over the years, the Dow Jones industrial average has grown to include 30 blue chip stocks actively traded on the New York Stock Exchange. Blue chip stocks are stocks issued by some of the best-known quality companies in the nation. These 30 stocks represent roughly 15 percent to 20 percent of the market value of all stocks trading on the New York Stock Exchange.

Because the stock market is closely tied to the health of the U.S. economy, companies in the DJIA reflect the economy's health. The companies are a mixture of manufacturing, technology, finance, health care and other firms.

The DJIA is based on a formula that adds the price of all stocks listed in the DJIA. This sum is divided by a number that takes into consideration such things as stock dividends and splits. The Wall Street Journal publishes the divisor daily, and the editors of The Wall Street Journal decide which stocks form the Dow Jones industrial average. The companies that form the DJIA rarely change. Indeed, the stability of the DJIA is largely responsible for its longevity and popularity.

Is there any way to protect myself from a market drop?

No one can totally insulate himself from the effects of a stock market drop. However, there are some things you can do to minimize the effects.

First, divide your investment dollars among different types of investments -- stocks, bonds, mutual funds and so forth. If any one of your investments falls in value, you'll have other investments to fall back on.

Diversify globally. International markets offer a great deal of opportunity. They've lagged behind the U.S. market in five of the past seven years. This is unusual because many foreign economies typically out pace the U.S. economy. If you are considering investing globally, consider mutual funds. Many mutual fund managers are seasoned foreign investors with long histories of successful money management.

Buy quality stocks that pay attractive dividends. Do your homework and find out which companies have consistently paid attractive dividends. Regular dividend checks can soften the blow of a downturn in the market.

Most importantly, invest for the long term. History has shown that those who invest for the long term reap the greatest benefits from investing in the stock market.

The Southeast Missourian does not recommend that readers buy or sell stocks featured in this column, which is provided for informational purposes only.