The Standard & Poor’s 500 Index, lost 9% in 2000, its worst year since 1974, and many stocks suffered steeper losses. In the same year, intermediate-term Treasury bonds returned nearly 13%. Therefore, having had some bonds in your portfolio would have reduced your loss.
What’s more, you never know when a bear market might hit: it could happen just when you need to make a down payment on a retirement home. To make sure you’ll have the money that will be needed then, you might keep that amount in bonds, which you can cash in to make the payment.
What kind of bonds should you hold? That depends on where you’ll hold them. If you hold your bonds inside a tax-deferred retirement account, you’ll want taxable bonds (Treasury or corporate issues), so the interest income won’t be taxed each year.
On the other hand, you might want to hold your bonds outside of a retirement plan, if there’s a choice. With this approach, you can hold stocks inside your plan so you can defer the tax on trading gains. Moreover, when your bonds are held on the outside you can cash them in for a down payment or other needs without having to pull money out of your retirement plan.