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Investing Specialists

Need Bonds Now? 4 Tips to Keep from Getting Pinched

Don't delay derisking, but proceed with caution when enlarging your bond stake.

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When it comes to investor behavior, the biggest head-scratcher during the past couple of years has been ongoing inflows into bond funds. Yields are meager and the threat of rising interest rates looms large, yet that didn't stop investors from plowing more than $100 billion into taxable- and municipal-bond funds in the first quarter of 2012 alone.

Is this yet another example of investors getting caught in the fear/greed cycle and exhibiting terrible timing as a result? There might be an element of that. Although equities have gained 20%, on average, during the past three years, it's likely that some investors are still scarred by what they endured in the recent bear market. They'd rather settle for what they expect will be a low but somewhat knowable return from bonds than risk big equity market losses again. And bonds have still generated better returns than stocks during the past decade.

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.