Money Essentials

The value of bond investing

A few reasons why you should consider bond investing and the value behind it.


Think "bonds," and you probably think "safe," "reliable," and . . . "boring." But that is only half the story.

Bonds can provide a worry-free stream of income. But this class of securities, which crushed stocks during the three-year bear market of 2000 through 2002, also includes a wide array of instruments with varying degrees of risk and reward.

Used improperly, bonds can really mess up your financial life. Handled with care, however, bonds are among the most valuable tools in your investment kit. Here are some of the benefits they can provide:

- Diversification. Large company stocks have posted compound annual returns of nearly 10% since 1926, versus 5.7% for long-term U.S. government bonds, according to Ibbotson Associates. Yet while stocks have returned more than bonds, they are also more volatile. Combining stocks with bonds will net you a more stable portfolio. As seen during the bear market, bonds' positive returns offset the double-digit losses from stocks.

- Income. Because bonds pay interest regularly, they are a good choice for investors -- such as retirees -- who desire a steady stream of income.

- Security. Next to cash, U.S. Treasuries are the safest, most liquid investments on the planet. Short-term bonds are a good place to park an emergency fund or money you'll need relatively soon - say to buy a house or send a child to college.

- Tax savings. Certain bonds provide tax-free income. Although these bonds usually pay lower yields than comparable taxable bonds, investors in high tax brackets (generally, 28% and above) can often earn higher after-tax returns from tax-free bonds.

calculator
Tax-equivalent yield converter
glossary
Glossary
take the test
Take
the test
more lessons
More Money Essentials
lessons
Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
Revolving door: Washington to Wall Street Former House Majority Leader Eric Cantor is headed to Wall Street. See who else has jumped the political ship for a lucrative career in finance. More
How to keep your naked photos out of hackers' hands Follow these steps to make sure that your nude photos and other sensitive information won't get hacked. More
9 reasons to be excited about Windows 9 Microsoft is expected to begin showing off Windows 9's features later this month. Here are the expected changes you should be thrilled about. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.