Why not leave the liquid part of the portfolio in a money market. You may lose 1 or 2% over the long haul vs. a bond fund, but there is essentially no risk and your equity accounts will more than make up the difference in the good years?Because long-term non-callable bonds can lock in a high rate of return for a significant period of time, something you cannot get with a money market. Let's say that some economists' speculations are correct and we are at the beginning of a century of low returns on capital (in the 3-4% range). In such an environment (one that existed for most of the 1800s) your money markets will return 1% at *best*, while, assuming your bonds are non-callable, you could find high-grade 20 and 30 year issues that would give you (roughly) a 7-9% return for a period where long-term equity returns would be unlikely to match that 7-8% figure Equities tended to return something closer to 4 percent in the 1800s, though in the early stages of the period, equity returns were very, very good, fairly comparable to the equity markets of the past 3 years or so. For the later stages, once firms' own returns of equity converged to much lower levels in the face of broad competition, unless you were a speculative investor, playing the Daniel Drew, Jay Gould, Jim Fisk game, you would have been hard-pressed to make much better than 4 to 6 percent annual gains in common stocks, including dividends.A strategic bond portfolio (the "ladder" many planners and finance types recommend) can also provide *some* protection from long-running declines in equity valuations that are likely to come should we see instead a return to or significant fear of a return to 70s-style inflation. In *that* environment you would not want *liquid* assets locked into bonds. For assets you wish to keep liquid, money markets are a good place to get modest to mediocre returns while building your portfolio and staying prepared for life's little surprises. Added up over 30 or 50 years, giving away even 1 or 2 percent compounded returns starts adding up to real money and a real difference in the ultimate size of your savings and investments.Straight bonds are *not* a place to keep your liquid assets if you have *no* idea when you may need to call them back for current needs. I don't think I said anything to suggest that they were. However, with a ladder that includes short-term bonds, you *can*, if you're as cheap as I am and your assets are significantly large to make individual bond purchases cost-effective, essentially make your own CDs by allocating funds you might otherwise park in a CD in selected bonds of comparable maturity. If your assets are not quite large enough, or you feel a professional manager will do better than you can with the help of common sense and a basic understanding of bond markets, then bond funds may make sense. I think I stated my own prejudices before regarding bond funds, though. I seem to recall that a lot of bond fund investors got some very nasty surprises in funds they thought were supposed to be safe and boring after the CMO derivative debacle a few years back.Going it without funds ensures that you only invest in instruments you think you understand. The CMO debacle, from my reading of it, came about because many fund managers *thought* they understood CMO derivatives, and experience showed that many did *not*.
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