Fun With Fixed Income


So far, 2014 has been friendly to bonds.

In the wake of an ugly 2013, the Barclays U.S. Aggregate Bond index, a popular proxy for the U.S. investment-grade bond market, has returned 3.0% so far this year. Long-term bonds have done even better, with both corporate and Treasury indexes delivering double-digit returns, double the S&P 500 Index's performance. The S&P 400 MidCap Index is up 3.5% and the S&P SmallCap 600 Index down 2.0% for the year.

Over long periods, stocks tend to deliver higher returns than bonds. However, most investors — even those who don't need to generate income via their portfolios — should hold both equities and fixed-income securities. Remember that the buy lists — including the short-term bond fund position — are designed to represent not a full portfolio, but the equity portion of a broader portfolio.

While different classes of bonds vary in risk, as a group bonds are less risky than stocks. And because stocks and bonds often follow different paths, bonds can help to diversify a portfolio containing mostly stocks. 

As the charts below show, bond indexes — particularly those focused on long-term bonds — have been competing with stocks so far this year. Of course, the relationship could change by next week.

For fixed-income ideas, check out next week's Dow Theory Forecasts, where we list our selection of bond funds. For information on our recommended funds, visit

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