Why You Need Bond Funds in Your Portfolio

July 22, 2007

With the stock market doing so well, you might be wondering…

1.  Why aren’t my bond funds performing well?  or
2.  Why do I need bond funds in my portfolio?

The main purpose of bond funds (or bonds) is to provide diversification for your portfolio.  Diversification reduces the risk that your portfolio will lose money in a market downturn.

Bond funds typically go down when the stock market is performing well, and up when the stock market takes a turn down.  So when your stocks and stock funds are performing well, it’s normal for your bond funds to have a small or even a negative return. 

A balance of stocks and bonds in your portfolio reduces the volatility of your overall portfolio, and reduces your potential losses during market downturns.

Still not sure if you need bond funds in your portfolio?  Check out these returns of stocks and bonds during market downturns:

Total Returns of Stocks and Bonds During Market Downturns
From December 31, 2000 to October 31, 2002 From June 30, 1990 to October 31, 1990 From July 31, 1987 to December 31, 1987 From December 31, 1972 to October 31, 1974
Bonds 29.07% 2.93% 2.97% 6.17%
Stocks -37.39% -14.09% -21.39% -32.99%
Source: Calculated by American Century Services, LLC, using information and data presented in Ibbotson Investment Analysis Software ©2007 Ibbotson Associates, Inc. All rights reserved. Used with permission. Stock returns are represented by the S&P 500 Stock Index, an unmanaged group of stocks considered to represent the stock market in general. Bond returns are represented by the Lehman Brothers Intermediate Government/Corporate Bond Index, an unmanaged market value weighted index of government and investment grade corporate fixed rate debt issues with maturities between one and 10 years. Stocks may be volatile. Past performance is no guarantee of future results.


Beacon Financial Advisors, LLC, is a fee-only financial planning and Registered Investment Advisory firm headquartered in Lee’s Summit, Missouri and serving the greater Kansas City area.

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Kristine McKinley, CFP®, CPA, is the founding principal of Beacon Financial Advisors, LLC, an independent, fee-only financial planning firm located in Lee’s Summit, Missouri and serving the greater Kansas City area.

Kristine focuses on providing fee-only financial planning, investment advice, and tax preparation to individuals and families from all income levels.  About Us

In the News

Investment News – Kristine McKinley discusses the 0% Social Security COLA (for 2016) in No Social Security cost-of-living adjustment in 2016.

Kiplinger Magazine/NAPFA – Kristine McKinley answered reader’s tax questions during the 2013 Jump Start Your Retirement Plan Days sponsored by Kiplinger magazine and the NAPFA Consumer Education Foundation.