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Matt, Re: Why Bond funds?

I thought I had addressed your questions, but let me boil down my thinking to the exec. summary version.

First off, I hate funds.

I especially see little use for bond funds, for many of the reasons that others have discussed here, as well as my general distrust of the level of "expertise" of bond fund managers, and the tricks fund managers must play to deliver marketable returns, compared to what I could do at home. My strong feeling is that funds (and their intellectual ancestors, the 1920s investment trusts) embody far more risk than those marketing them will freely and in plain language admit.

So if you ask me "Why should I own bond funds?" my simple answer is "You shouldn't." But then I also feel that neither should people open themselves up to the uncharted (and, I feel, insufficiently disclosed) risks of equity funds.

I do feel that the risk/reward ratio is *probably* a little better for holders of equity funds as a class, and there are also exceptions I might make for a handful of fund managers who have gained my respect over the years in running specialty funds that invest in ways that I would find difficult to do at home.

Putting aside my dislike of funds, please refer to my previous message for the details on why I feel that owning bonds (not bond funds) provides a *different* and important form of portfolio insurance that MMs and equity funds (by and large) are unable to provide.

It is *possible* that investing in a small portfolio of established, dependably dividend-paying common or preferred issues *may* give you similar current income protection in retirement, but *nothing* guarantees that any common stock will pay dividends in perpetuity, and even those that do pay out earnings to shareholders may find themselves forced to cut dividends in a long-term downturn. If that decade (or generation or century) of tight earnings growth is preceded by a collapse in equity prices it will be too late to rebalance towards bonds without taking a major hit in the value of your remaining principal.

Of course, I also don't know the details of any pension, profit-sharing or other sources of retirement income you may be looking forward to relying on. If you already effectively *have* a good deal of stable, guaranteed income in the form of pension, annuities or other sources, there may be no real benefit to you personally in heaping up more bonds, when chances are good that you are holding a significant chunk of bonds by proxy in those other instruments.

My 2 cents, compounding at some unknown rate, possibly negative... {smile}
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