Why Bonds?

Bond portfolios serve a number of objectives, but their main goals are principal preservation and income generation.

Bonds are historically safe investments

Historical evidence shows that investment grade bonds with Aaa/AAA ratings are very safe investments. Statistics dating back to 1920, which includes the Great Depression, indicate that there is less than a 1% probability of default on bonds if they are held to maturity. Since 1970, the record has been even better.

The only investments with lower expected default rates are Treasuries, CDs and annuities; however, such instruments also offer lower yields. This is especially true today when interest rates are at historically low levels.

Additional benefits of investing in bonds

Additional benefits of investing in bonds include:

  • You do not pay ongoing fees with individual bonds.
  • Returns on all investments other than bonds are unpredictable. Individual bonds can provide a steady stream of income regardless of the value of the bond, and you get all of your money back at maturity.
  • Bonds provide much needed diversification, smoothing out the higher volatility connected with equities.
  • You can select the quality that you want.
  • You can align your investments with your financial goals and life objectives, rather than speculating in the markets.
  • A bond portfolio can be “immunized” so that you receive a specific rate of return over a given time period regardless of what happens to interest rates during that time.
  • You can build a personal pension in retirement by delivering predictable near-term income and higher long term returns.

Bonds vs. Stocks

It is important to realize that bonds can and do decline in value, but historically they show much less volatility than stocks do, as you can see in the following table:

Name

Ticker

Inception Date

Worst 1 Year Return

10 Yr Avg. Return(as of 3/31/12)

Vanguard Total Bond Market Index

VBMFX

1986

-00.76 in 1999

5.51%

Vanguard Total Stock Market Index

VTSMX

1992

-37.04 in 2008

4.92%