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ETF Specialist

Bonds as the Ballast

Despite their relatively low expected returns, bonds still provide diversification and stability.

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After a blockbuster year for stocks and concerns about rising interest rates, some investors might be entertaining the idea of ditching their bond holdings. We've all heard the argument, "interest rates can't go much lower." Fair enough. And while interest rates have inched up since the summer of 2013, they are still close to historic lows. I can't tell you whether rates will continue their move higher by the summer, year-end, or 2016. But I can tell you that bonds play a critical role in a balanced portfolio.

It's not the sexiest asset class, but fixed income does offer important diversification benefits on top of a stable and steady income stream. 2014 is off to a rough start. With volatility on the rise, the S&P 500 Index fell about 3.5% in January. But while stocks turned south, the bond market has rallied. In the first month of the year, the Barclays U.S. Aggregate Bond Index rose 1.5%.

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John Gabriel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.