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- Diversification. Large company stocks have posted
compound annual returns of around 11.3 percent since 1926, versus 5.1
percent for long-term U.S. government bonds, according to Ibbotson
Associates. But while stocks have returned more than bonds over most of
this decade, they are also more volatile. Combining stocks with bonds
will net you a more stable portfolio.
- Income. Because bonds pay interest regularly, they are
a good choice for investors -- such as retirees -- who desire a steady
stream of income.
- Security. Next to cash, U.S. Treasuries are the safest,
most liquid investments on the planet. Short-term bonds are a good place
to park an emergency fund or money you'll need relatively soon -- say to
buy a house or send a child to college.
- Tax savings. Certain bonds provide tax-free income.
Although these bonds usually pay lower yields than comparable taxable
bonds, investors in high tax brackets (generally, 28 percent and above)
can often earn higher after-tax returns from tax-free bonds.
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