With the broad stock markets in the US and around the world going through some gut-wrenching volatility, bonds are garnering their respect back from more and more investors who are concerned about the performance of their portfolios. The reason is an old one we’ve been writing about for years: Nothing beats cash coming in month after month. Whether you’re building your portfolio or living off it, the surest way to tap into this constant cash flow is to buy bonds and bond funds.

Our Taxable and Tax-Free Portfolios continue to prove their value, regardless of the overall bond market conditions. For example, despite extremely volatile interest rates, our selections are comfortably ahead for 2007, sustaining our positive performance since we started Bond Desk; they’ve even trounced bond market averages.

As a subscriber to Bond Desk, you shouldn’t need any further convincing regarding the advantages of owning bonds. At the same time, though, you need to have a game plan when making your choosing from our collection of individual bonds and bond funds as well as some of the bond-like investments, such as preferreds.

We’re in the middle of making some changes to the Bond Desk Portfolios that will help you in this selection process. We want you to understand why we recommend each holding and how to select those that will work best for your portfolio. We’ll have the changes completed in the next few weeks.

In the meantime, let’s review our two major Portfolios and the types of holdings and how they fit into building a better bond portfolio.

We have two primary Portfolios: the Taxable Portfolio and the Tax-Free Portfolio. This presents a big decision for every investor: Should you focus on bonds that pay interest that’s taxable, virtually always at ordinary income tax rates, or do you focus on earning income from municipal bonds and bond funds that aren’t taxed at the federal or state level or both.

Tax Me

The Taxable Portfolio is broad, and it’s growing. This has led to our successful collection of individual issues and funds. However, a diverse collection doesn’t necessarily make it easier for you to pick and choose.

In the next few weeks, we’ll be unveiling three new groupings in the Portfolio based on risks, objectives and speculations. Risk comes from credit issues and, more important, market volatility and price action. Objectives come down to maintaining a steady, higher stream of income as well as price gains (i.e., total return).

We focus on total return. We buy bonds and other income investments that generate higher cash flows for us and, over time, will gain in price because of individual issue developments and/or market changes.

Yet, we know that underlying cash flows draw many to bonds for long-term holdings. We’ll group the Portfolio holdings to fit into these two classifications (that is, risks and objectives).

We also know that many investors are willing to put some cash into holdings that have a strong potential for big gains and high cash flows but that come with added risk. We’ll break out a few speculative recommendations into their own grouping.

Note, in the process of reorganizing the Portfolios, we won’t be getting rid of any of our current picks; they’ll simply be grouped into new sections that make it easier for you to pick and choose from.

Got You Covered

We’re not going to leave you high and dry until we unveil these changes and new groupings to you. Here’s what to do now when making your selections from our current Taxable Portfolio right now.

We currently hold four basic types of recommendations. First are the government bonds, primarily from foreign markets. These may be more challenging for some brokers to get for you until they know you.

We have specific issues in the Portfolio. However, if your broker has access to other bonds from the same issuer in the same currency (most are US dollar-denominated) with similar coupon rates and maturities, those will work well and fit into our recommended strategies.

The second type of recommendation is corporate bonds. We select the individual corporate issues for their characteristics, particularly because they’re liquid and available to investors in sufficient quantity at prices that are a good deal. But given the US and world bond market conditions, we know that many bonds don’t always show up on individual brokerages’ trading systems and books.

The same goes for our corporate bonds as for our government holdings: If your broker has an alternative that matches up in issuer and currency with similar coupons and maturities, it’s fine to add those to your portfolio.

Our third type of holdings is bond funds. These are primarily closed-end funds with a few select open-end varieties. They’re all easily traded and liquid, so all investors can buy and hold them regardless of their brokerage and account size.

These funds should be a part of your portfolio as a base, whether a small or large base in terms of overall investment.

Fourth are preferreds and other debt-like securities. These are part of our strategy of maximizing cash flows while giving you the opportunity to build value through price appreciation.

For now, here’s how to begin building your portfolio from the Taxable Portfolio as it is now.

First, build your base with our bond funds, starting with the closed-end recommendations. Buy the collection, which shouldn’t be prohibitive, given the current costs of brokerage.

For those with larger accounts, move on to the corporate issues. You can cherry pick these ones. Our recommended government issues are the next level above corporates. Select these for your portfolio after you’ve added the bond funds and the corporate issues.

As for the preferreds and similar securities, they’ll work well for everyone to bolster fund holdings in smaller accounts as well as corporates and government holdings in larger accounts.

Tax-Free

Our collection of tax-free bonds and bond funds is smaller and focuses on select states and broader nationwide funds. We’ll be expanding on this as we change the Portfolios. In the next few weeks, we’ll be recommending a collection of municipal bonds and bond funds for each of the 50 states.

Regardless of whether your taxable residence is Missouri, California, Virginia or any other US state, we’ll have picks and guidance for your portfolio and allocations.

For now, though, our select holdings are relatively liquid and available from most brokers with little issue. As with our Taxable Portfolio individual bond issues, these municipal bonds are our first picks. But if your broker has a similar bond with similar maturities and collateral backing, it’s fine to buy that; it will still fit into our methodology.

If you have a query about an individual issue, we’ll take a gander at it and see if it fits with our view for the market and the individual state conditions.

As for the tax-free bond funds, they’re nationally focused funds, primarily closed-end funds. Anyone can buy these and will be exempt from federal taxes, although you may have taxable liabilities in your current state of residence.

This will be eliminated for many of you when we add recommendations for each state. That way you can invest in locally focused funds, not just those that are nationally focused.

Finally, we’ve received some e-mails regarding the Market Portfolio. It currently houses additional picks. As we reorganize and change the Portfolios, we’ll clear up any confusion that surrounds the Market Portfolio.

But for now, this is simply an secondary portfolio with additional picks. We’ll integrate the Market Portfolio picks into our new Portfolio groupings in the next few weeks.

Stay tuned for more.