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
Want to buy -- and live in -- a piece of history? It's not that far out of reach. These historic homes are not only for sale, they are incredible bargains. More
5 ways retailers are tracking you If you think pesky salespeople are invading your personal space, check out these 5 technologies that are tracking your movements throughout a store. More
Moto X vs. Droid Turbo: Which Droid should you buy? Motorola has made the two best Android smartphones this year. Here's how they stack up. More

Most stock quote data provided by BATS. Market indices 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.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.