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Premium Fund Selector: How to Be a Bond Fund Snob

It pays to be picky.

For many investors this year, the customary "flight to quality" that often accompanies market downturns hasn't meant making additional investments in their core equity holdings. With stock market averages in the gutter for a third consecutive year, plenty of folks have sought the relatively peaceful, easy feeling that comes with investing in bond funds.

And why not? It's true, of course, that over the long haul, bond funds have lost out to their equity counterparts. Nonetheless, for the trailing three- and five-year periods ended September 30, 2002, investors in the average bond fund have eked out modest gains while shareholders in the average domestic equity fund have suffered losses. In a recent investment-outlook piece, a gloating Bill Gross assessed the state of the stock market in typically provocative fashion: "[S]tocks stink," wrote PIMCO's guru of bond investing, "and will continue to do so until they're priced appropriately."

What's appropriate is a tough call, of course, and for investors with long time horizons, equities remain the place to be. Simply put, no other investment vehicle has delivered as much bang for the long-term buck. Moreover, like the stock market, the bond market is also susceptible to "irrational exuberance".