Domestic stock funds lost about 38 percent of their value last year, according to Morningstar. Bond funds, especially government bond funds–which hold Treasury bonds–did much better:
* Long-term government bond funds had total returns of 27.10 percent last year.
* Short-term and intermediate-term government bond funds gained 4.74 percent and 4.73 percent, respectively.
* Municipal single-state short-term and municipal national short-term bond funds returned 0.92 percent and 0.74 percent, respectively.
Otherwise, all bond funds and all stock funds (except bear market funds) lost money in 2008. However, while stock funds lost huge amounts–up to 59.79 percent for funds holding stocks from Latin American countries–bond funds lost less.
On average, taxable bond funds lost 7.84 percent and municipal bond funds lost 7.47 percent. Therefore, you should consider holding bond funds in your portfolio to provide downside protection in years when stocks are weak. Funds with low expense ratios holding high-quality bonds may be your best choice.
