I have a couple different kinds of readers. The first group understands how I like to buy bonds. This type of reader is content to buy and hold, collect the cash along the way, and now and again sell a position now and then to book a gain and move to another opportunity.

The second group reads, pokes around my recommendations, perhaps makes a buy, and then watches the recommendation move along at a snail’s pace; down one week, up another, never really doing much. That type of reader begins to wonder, “What am I doing this for?”

You might fall into a camp, or you might entertain thoughts of both types. And that’s fine.  I would, however, like to convince more of you to look at bond investing not as some mark of oddity, but as a core part of your portfolio building.

This is a tough case. Bonds are boring. They move in odd ways, and they’re harder to check up on; you rarely hear them mentioned in the financial news. Even when I suggest the newer, more accessible mini-bonds, many of you think, “Why don’t I just go back to stocks with big dividends?”

Let’s face it: Stocks are more exciting. But excitement isn’t working right now. It’s stimulating to get wound up as the stock market bounces around. All the talking heads bobble about discussing why the market should rebound or debating whether the bear is headed back to hibernation.

But that’s not a reasonable, prudent way to make more money, much less keep the cash you have.

And everybody’s talking about inflation; you’re living it, too.

The cost of living is getting out of hand. Even McDonald’s (NYSE: MCD) is about to change its dollar menu, announcing that prices may be going up. What’ll it be next, the “dollar-plus menu?” The hamburger king can’t afford its input goods’ cost hikes.

And with inflation comes the usual fear that bonds are doomed.

Every investment has to be considered in light of inflation. It doesn’t matter what you might buy–a stock, bond or fund. If the returns aren’t outgunning the rate of inflation, buying power’s eroding.

Let’s dispense with the usual hindrances. An investment decision boils down to what’s working and why.

Right Now

Bonds aren’t just outperforming stocks and many other investments in this downturn; they’re actually making money. That’s why you should be buying. The point is not to create material for your next cocktail conversation.

It makes more sense to buy a collection of bonds that’ll make it possible for you to take time to enjoy a cocktail party, as opposed to contemplating a part-time job to help generate more cash.

Our collection of bonds, bond funds and bond-like investments continue to percolate along, nice and simple. That’s what you should look for when you make investment choices.

The average return for our collection of six closed-end international bond funds in 2008 is 9.4 percent. That’s a lot better than the S&P 500’s 14 percent-plus loss for the year. And the funds are paying an average yield of more than 7 percent.

40/86 Strategic Income (NYSE: CFD), AllianceBernstein Global High Income (NYSE: AWF), BlackRock Income Opportunity (NYSE: BNA), PIMCO Strategic Global Government (NYSE: RCS), Templeton Emerging Markets Income (NYSE: TEI) and Western Asset Emerging Market Floating Rate (NYSE: EFL) are paying well above inflation and giving you gains to boot.

The buy call should be an easy one. And they’re now trading at an average discount to net asset value (NAV) of more than 4 percent. You can the underlying bonds cheaper via the funds, which pay you well and continue to give you gains.

Our bond-like preferred shares are giving you similar performance. The four preferreds still held in the Taxable Portfolio–AES Trust III 6.75 Percent Series C, CMS Energy 4.5 Percent Series B, Health Care REIT 7 5/8 Percent Series F and Mid-America Apartment Properties 8 Percent Series H–have returned an average of 5.4 percent. The four pay an average quarterly dividend of 7.5 percent.

We haven’t seen results as impressive in the Non-Taxable Portfolio, but we do enjoy lower federal taxes and the security of owning government bonds backed by the power to tax. 

The closed-end fund collection in the Non-Taxable Portfolio, which includes Alliance Bernstein National Municipal Income (NYSE: AFB), BlackRock Municipal Income (NYSE: BLE), BlackRock Municipal Intermediate Duration (NYSE: MUI), Nuveen Quality Income Municipal (NYSE: NQU), Nuveen Select Maturities Municipal (NYSE: NIM), Western Asset Managed Municipal Portfolio (NYSE: MMU) and Western Asset Municipal High Income (NYSE: MHF), has generated a year-to-date return of 1.1 percent. The average dividend yield is about 5 percent, good for a tax-equivalent rate of more than 7 percent.

Beyond Buy and Hold

If you want to be a bit more active with your own picks, we recommend a collection of mini-bonds in the Taxable Portfolio that are a bit more volatile.

Our 14 individual bonds span a wide variety of industries and individual issuers, and they provide higher yields.

Overall returns are all over the board, and, even among companies in similar industries, the variation in 2008 performance is quite wide.

Take, for example, the telephone operators. Qwest 7.75 Percent Note of 02/15/31 (NYSE: PKH) is down 28 percent, US Cellular 7.5 Percent Note of 06/15/34 (NYSE: UZV) is flat and Verizon Communications 7.625 Percent Note of 12/01/30 (NYSE: PJL) is up 4.3 percent.

The key here is to know when to buy more of which securities and when.

There’s absolutely nothing wrong with buying the entire collection, including the three telecoms. If you do, you’ll see a robust, consistent stream of dividends flowing quarter after quarter. Along the way you’ll also ups and downs for prices.

The experience will be as exciting as watching paint dry. The longer-term trading history for the majority of our mini-bonds reveals that they rise and fall but are fairly steady over several quarters.

However, if you want to be able to make more of the market’s trading of them, there’s plenty to work with. Follow the pricing and values of each of the mini-bonds, including the call price and our “buy up to” targets.

You’ll have two ways to put more excitement into your own collection. First, buy on the cheap. Let’s use the telecom example again to illustrate the point.

Qwest 7.75 Percent Note of 02/15/31, trading at a discount to its $25 call price of 14 percent, is currently yielding more than 9 percent. It continues to pay right on schedule and, as we’ve seen in the telecom industry, consolidation is always a possibility. Qwest 7.75 Percent Note of 02/15/31 makes for a great bargain buy at current levels.

There’s a second point to make about cashing in on market gyrations. Take Verizon Communications 7.625 Percent Note of 12/01/30; it’s on the upswing, and although we’re still buyers you might want to take some of your gain and roll it into the cheaper Qwest issue. As Qwest’s mini-bond turns higher, move that gain into cheaper alternatives, whether it be US Cellular 7.5 Percent Note of 06/15/34 or the Verizon mini-bond.

All but one of our mini-bond holdings, Tribune Corp 7 Percent Note of 11/15/96 (NYSE: HJS), are rated buys. And given that the market still treats these issues as if they’re preferred stocks rather than bonds, the remaining 13 are all are great buys up to prices listed in the Taxable Portfolio.

AMR Corp 7.875 Percent Note of 07/13/39 (NYSE: AAR) is particularly attractive, trading at a discount of 31 percent and paying 13 percent. The price of petrol is pulling back, and this is a good way to capitalize on the relief and the improved cash flow for AMR Corp. The market will also start to appreciate airline companies as their operating conditions improve. Buy AMR Corp 7.875 Percent Note of 07/13/39 at current prices.