In the 2008 stock market crash, all the asset classes thought to provide diversification also suffered huge losses. They included international securities, real estate, commodities, and gold.
At the same time, government bond funds delivered solid gains while general bond funds and municipal bond funds had modest losses. Therefore, investing in bonds has proven to be the best way to diversify your portfolio to protect yourself against a bear market for stocks. In addition, bond funds offer current yields that generally are higher than those for money market funds or bank accounts.
Although you should hold bonds or bond funds in your portfolio, you need to be careful. Funds in the same category may have vastly different of returns. Last year, for example, PIMCO Extended Duration Institutional Fund gained 49 percent while another fund in the Long-Term Bond category, Legg Mason Investment Grade Income Primary Class, lost 26 percent.
Before buying any bond fund, read the prospectus to see what the fund will be doing with your money. A fund that has the ability to borrow money or hold low-rated bonds may be riskier than you’d expect.