Investors may find shifting from stocks to bonds causes more problems than it solves

Investors getting beaten up in the stock market often look to bonds as a safe place to stash their money. But they need to make their moves deliberately or they can end up losing money rather than stabilizing a portfolio.

Common mistakes investors are likely to make include moving too quickly, and not paying enough attention to the kinds of bonds they're buying.

The idea of moving toward safety is more complex these days because some of the chaos in the financial markets stems from bonds - including those tied to risky mortgages that have since gone into default. The multiplication in recent years of the types of fixed-income investments means that not all bonds are the same; while the government provides safe investments, there are also bonds that bring in higher returns but take more chances to do so.

Rich Berg, chief executive of Performance Trust Capital Partners, said investors need to understand that the more complex the investment, the more likely they are to spell trouble.

He said investors also need to consider how much they're willing to sacrifice in investment returns to safeguard their money by putting it into bonds. That's important because interest rates are low, limiting what many bonds pay. "If people are OK with a long-term return of between 3 and 4 percent, go put your money in government bonds. But don't expect 6 to 8. It can't happen," he said.

They might want to consider that professional investors have been stashing cash into three-month Treasury bills, sometimes earning almost nothing, but secure knowing their principal will remain intact. The average investor doesn't need to look for such short-term investments, but that kind of safety is what makes government debt of all maturities so attractive.

Stuart Ritter, a certified financial planner at T. Rowe Price Associates Inc., said investors who do want to make money shouldn't simply scout around for the highest returns because market forces can shift what is in favor - and those returns could then head south.

And he warned that investors who move too much money into bonds might risk earning so little they can't keep pace with inflation. Consider an example of how two investors with $1 million portfolios at the start of 2001 would have fared by taking two different paths, according to T. Rowe Price research.

The first investor who panicked and shifted from stocks to cash during the downturn that followed the tech-stock boom and the Sept. 11, 2001, terror attacks would have ended up five years later with about $700,000, while the investor who stayed in stocks and rode the ups and downs would have come out with about $1.25 million.

But before putting money into bonds or bond funds, investors should remember, again, that those paying higher yields are likely taking on more risk. And a conservative approach can be in order for investors who will soon need money.

Tim Paradis writes for the Associated Press.