They are Dull but Steady, compared with stocks

"Who do you think has a better deal going: an entrepreneur or a banker? Investing in stocks and bonds offers a pretty similar risk-reward trade-off.

When you buy a stock, you're becoming a partial owner of a company. If the enterprise thrives, you get a cut of the profits, either through a rise in its stock price reflecting growing earnings power, or via regular payments known as shareholder dividends. If the company becomes sickly, you're likely to suffer too, as the price of your stock sinks and the dividend payments are cut or suspended.

Bondholders, on the other hand, are like mini-bankers. When you buy a bond, you are lending money to a company or government entity. In exchange, the borrower agrees to pay you a fixed rate of interest, known as a bond dividend. Unlike the dividends on stocks, these are legal obligations and can only be suspended by the issuer in the most dire of circumstances. Because the payments are supposed to be set at a predetermined rate, bonds are known as fixed-income investments.

When you lend out your money by buying bonds, the party that issues them is legally bound not only to pay you regular dividends but to return the money you lent it, known as principal, at the end of a set term. Such terms can range from one day to 30 years. If the borrower runs into financial trouble in the meantime and becomes unable to repay all its obligations, or if it declares bankruptcy outright, the law states that bondholders get back their principal before stockholders receive a dime. That safety is appealing in volatile markets.

"In an environment where stock dividends are being ratcheted down or extinguished, you can count on the coupons from your bonds," says Marilyn Cohen, Forbes' fixed-income columnist."

• Bonds are back
• "Bonds Basics"

Money Week recommends bonds in current volatile market

"When the economy is on the up, bonds tend to fall in popularity because you can get far greater returns from other, albeit riskier, investments such as stocks and commodities.

But right now, as the country is in recession and heading for deflation – at least in the short term – then bonds are a lot more attractive. For one thing, they pay a fixed income which rises in value as returns on other assets, such as cash, decline. For another, they offer far greater security than investments such as shares (if, for example, a company goes bust, bondholders have a claim on the assets, ahead of shareholders).

Because spooked investors are selling off company debt indiscriminately, we believe that corporate bonds in particular offer some of the best value opportunities in the market today."

Money week

The Barclays Equity Gilt Study 2009,

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Bonds crushed equities over the last decade

The last consecutive decade in which stocks produced a lower real return than Treasuries, was 1967-77 in the US and 1927-37 in the UK. Barclays says during the past 110 years, there have been some 16, 10-year periods that bear resemblance to the decade just past and like in the past decade in which investors who prudently re-invested their dividends lost money after inflation - each time, they made money in the next ten years, by an average of almost 11% a year even after factoring in rising prices

The last 30 Years

“How bad is it? Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the ’70s.” Stocks arena’t always the best investment, and Mauldin goes on to make a point he frequently repeats and that every investor should keep in mind: “...the long-run, 20-year returns you will get on your stock portfolios are VERY highly correlated with the valuations of the stock market at the time you invest.” John Maudlin

Equities have historically returned 6.2% per annum over the last 109 years.

This time period allows for the volatility of the extreme downturns - 54% in 1929 and 53% in 2008. 1929 took 20 years to recover to former highs.

For anyone who needs income and doesn't have 20 years to wait bonds reduce volatility and increase reliability of cash flow. We are offering 7% per annum as a bond yield which theoretically outperforms equities and allows for the effects of compounding if one were to reinvest it.

• compounding - "the most powerful force in the universe" Albert Einstein.
• Bonds avoid volatility