For the investor who is only focused on growth and can stomach volatility, stocks have proven to be the best way to grow your money over time. But if you are looking to control your risk and help smooth out the ride, bonds should have a place in your portfolio.
However, as I’ve been explaining in my Bonds 101 articles here and in my newsletter, The Independent Adviser for Vanguard Investors, there are several factors to consider before you pick a bond or bond fund to invest in.
When it comes to bond funds, the Vanguard formula is tried and true: Keeping costs low doesn’t force the portfolio managers to reach for yield, instead allowing them to build plain-vanilla portfolios that have been very competitive from both a yield and a total return perspective. I have confidence in Vanguard’s ability to continue to execute these strategies well, both on its indexed and actively managed funds. (Remember, when it comes to bond funds, Vanguard does manage a significant portion of the in-house assets actively. Where it doesn’t manage the assets on its own, the firm has partnered with Wellington Management.)
That said, there are some areas of the bond market I prefer over others, and some that I would avoid entirely: