Most people invest in bonds because they want to have stable fixed income. Because the performance of bonds are very stable, they also serve to reduce the volatility of the overall portfolio. Depending on the weighting from 0% to 100%, you can reduce your stock volatility correspondingly. With regular re-balancing between your stocks and bonds, you should be able to “sell high and buy low” in your stock portfolio, and use your bonds as a stable source of income.
Everything sounds good so far, but the most attractive feature of fixed income is also its greatest drawback — the income is FIXED. It does NOT increase as time goes on, and inflation keeps reducing your principle and interests into nothingness. Since inflation is almost always there, you’ve got a real problem especially when you’re investing long term in long term bonds.
