For a steady fixed income, skip mutual funds and put together your own portfolio of INDIVIDUAL BONDS.

CHRISTINE Rosenfield learned about bonds from her mom. Years before, her mother had learned about them from her father, a stock-market speculator whose declining health prompted him to tutor his daughter in fixed-income investing. But unlike the millions of Americans who invest in bonds through mutual funds, Rosenfield invests in them the old-fashioned way: She buys them one at a time.

A 65-year-old doctor who lives near Richmond, Rosenfield has long appreciated the advantages of do-it-yourself bond investing. When you pick your own bonds, you avoid having to pay management fees to a fund company. You control a bond's maturity date, whether and when it can be called (bought back from you at the issuer's discretion), and its yield. "You're locked into an income stream and you know how long it will last," says Marilyn Cohen, a money manager at Envision Capital Management, in Los Angeles. "That's the predictability of bonds." But if you invest in bonds through a fund, interest payments can fluctuate, and your principal can erode even if you do nothing.

Rosenfield is not an either-or investor; she owns plenty of stocks, too. But it was her holdings in bonds issued by the U.S. Treasury, various state and local governments, and such blue-chip companies as IBM and Ford that allowed her to weather the recent stock-market meltdown without going crazy--or broke. "I'm under a lot less pressure to sell at an inopportune moment because the bonds are generating income," she says.

What Rosenfield learned at an early age countless first-generation investors are only just realizing: There is a place for bonds in almost every portfolio. "That includes twenty-somethings, professional athletes and tech millionaires," says William Hornbarger, a bond strategist at brokerage A.G. Edwards. How much you have in bonds should depend on your need for income, your time horizon and your tolerance for risk.

The bond market can be complicated, with nearly two dozen types of securities vying for your attention. Corporate "junk" bonds, emerging-market debt, and some of the more esoteric mortgage securities are best left to the pros. But as long as you steer clear of those complex and high-risk sectors, there's no reason that you can't buy individual bonds.

If you invest inside a tax-deferred account, such as an IRA, you'll almost always own taxable bonds. In other accounts, your tax bracket should dictate whether you own taxable bonds or tax-free municipal bonds. Interest earned on muni bonds (those issued by state and local entities) is exempt from federal (and often state) taxes. If your marginal federal income-tax rate is 28% or higher, it generally makes sense to invest in municipal bonds, because their tax-free yields will probably exceed those of comparable taxable bonds after taxes.

Gauge your risk tolerance

LONG BEFORE you go yield shopping, however, you must be clear about your goals and how much risk you can withstand. "The first thing people focus on is yield, and that throws a lot out of the equation," says A.G. Edwards's Hornbarger. "You say you need 8%. In 1994, that was a two-year Treasury note; now it's a junk bond."

Gauging risk in the bond market begins with credit quality. U.S. Treasuries are the gold standard because Uncle Sam is the issuer least likely to default. Next come bonds issued or backed by government agencies (such as the Government National Mortgage Association, known as Ginnie Mae, and the Federal Home Loan Banks), then investment-grade corporate or municipal bonds--those rated BBB or better by Standard & Poor's, or Baa or better by Moody's Investors Service. Any bond with a lower rating is considered speculative, or "junk."

The ratings game can get tricky in the municipal-bond market. Private companies provide insurance guaranteeing the timely payment of principal and interest for more than half of the 1.5 million tax-exempt bonds in the marketplace. That earns those bonds AAA ratings, but "if things really get ugly in the economy and defaults kick up, there's something to worry about," says financial planner Michael Joyce of Bethlehem, Pa.--namely, the remote possibility that the insurers won't be able to fulfill their obligations. To play it safe, he advises clients to focus on munis whose underlying rating (that is, their rating without insurance) is at least A.

But just because an issuer is unlikely to default doesn't mean that its bonds are low-risk. Because bond prices move inversely with yields, even Treasuries will lose value if interest rates rise. The farther out a bond's maturity date and the lower its interest payment, or coupon rate, the more prices will drop in response to rising interest rates. Of course, if you hold a bond until maturity and the issuer doesn't default, those interim price changes aren't important. The big risk for the long-term bondholder is inflation. Unless you think inflation will soar, you shouldn't be too concerned if your brokerage statement occasionally shows a loss in bonds that you plan to hold until maturity.

Investors concerned about preserving capital should, in theory, buy only short-term Treasuries. But you can boost your yield with high-quality corporate bonds without taking undue risk. More-aggressive investors may want to own some medium-quality corporate bonds. Or, if you want to bet on lower interest rates, you could buy long-term, zero-coupon bonds to capitalize on the corresponding jump in bond prices. You can also buy zeros for the long term, a strategy for ensuring that your investment will grow to a predetermined amount at maturity.

How to build the portfolio

IN ASSEMBLING a portfolio, most investors should buy bonds with a range of maturities, coupons and credit quality. As with stock investing, diversification is key to cutting risk. To minimize credit risk, you should start with six investment-grade bonds, in increments of $15,000 to $20,000 each. (You can get by with four only if the bonds' credit quality is top-drawer.) If you concentrate on corporate bonds, you should diversify by industry. You might also consider investing some money in taxable muni bonds, which are issued to finance projects that don't benefit the public at large--for example, a stadium or a water park. Although you'll have to pay federal income taxes on interest from taxable munis, you'll often avoid state and local taxes if you buy ones issued in your state. In effect, that allows you to get the same yields you could through corporate bonds but with a fraction of the risk, says money manager Cohen.

If you invest in munis, don't limit yourself to bonds issued by authorities in your state. You generally avoid state income taxes by buying in-state munis; but you don't want to risk having all your bonds suffer because of problems confined to your state.

To mitigate the risk of rising interest rates and inflation, you'll want a range of maturities and coupons. One sensible strategy is to "ladder" your bonds. A ladder staggers maturities. so that you have some money coming due every year or, say, every five years, or at any interval you choose. If interest rates rise, you can take the proceeds from some of your short-term bonds as they mature and buy new ones with higher yields. With some of your money in longer-term bonds, a ladder also helps address reinvestment risk--the risk of having to buy bonds with lower yields should interest rates fall. (For a look at four sample bond portfolios, see the box at left.)

Where to buy them

SO ONCE YOU know which bonds you want, where do you purchase them? You can buy Treasuries from the Bureau of the Public Debt's TreasuryDirect program. You tender a bid stating how many bonds you want when the government issues them at one of its regular auctions (more than 150 are scheduled throughout the year). You then agree to receive the average rate, determined by the outcome of the auction. To open an account, visit www.treasurydirect.gov to download forms, or call 800-722-2678. Once your account is open, you can buy online or by phone.

You'll need a broker to buy both municipal and corporate bonds. A good place to look for tax-free bonds is at a regional brokerage that underwrites them, such as Janney Montgomery Scott, Ferris Baker Watts and BB&T Capital Markets. On long-term bonds, says financial planner Joyce, you might pay a full point less ($10 on a bond worth $1,000) than at the national houses. Don't expect better deals at discount brokers. Full-service brokers with bigger inventories can often offer better prices.