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Special Report

Bond Basics

Bonds get no respect. They're not glamorous--unlike their stock-fund counterparts, bond-fund managers rarely, if ever, turn up on the covers of personal finance magazines. Their long-term returns are lower than the stock market's, and many investors simply have no use for them. Several years ago at a Morningstar Conference, Wall Street Journal columnist Jonathan Clements even went so far as to say that the only thing worse than buying a bond is buying a bond fund.

While we usually agree with Mr. Clements, we'd respectfully submit that bond funds do have their place. For starters, they make a lot of sense for investors with a short time horizon. They let you sleep well at night. They also offer diversification for a stock-heavy portfolio. And while the last couple of years haven't put them in a flattering light, their performance isn't always anemic in comparison with that of stock funds: From 1985 to 1995, long-term government bonds actually outpaced small-company stocks.