What's the difference between buying bonds and buying bond funds for the long-term?
"A bond fund will typically own a range of bonds of various durations, in your specific fund: The fund holds high-quality long-term New York municipal bonds with an   average duration of approximately 6–10 years So through this fund you get to own a range of bonds and the fund price will behave similar to you owning the bonds directly.  The fund gives you a little diversification in terms of durations and typically a bit more liquidity.  It also may continuously buy bonds over time so you get some averaging vs. just buying a bond at a given time and holding it to maturity.  This last bit is important, over long durations the bond fund may perform quite differently than owning a bond to maturity due to this ongoing refresh.  Another thing to remember is that you're paying management fees for the fund's management. As with any bond investment, the longer the duration the more sensitive the price is to change in interest rates because when interest rates change the price will track it. (i.e. compare a change of 1% for a one year duration vs. 1% yearly over 10 years) If I'm correct, why would anyone in the U.S. buy a long-term bond fund   in a market like this one, where interest rates are practically   bottomed out? That is the multi-trillion dollar question.  Bond prices today reflect what ""people"" are willing to pay for them.  Those ""people"" include the Federal Reserve which through various programs (QE, Operate Twist etc.) has been forcing the interest rates to where they want to see them.  If no one believed the Fed would be able to keep interest rates where they want them then the prices would be different but given that investors know the Fed has access to an infinite supply of money it becomes a more difficult decision to bet against that.  (aka ""Don't fight the Fed"").  My personal belief is that rates will come up but I haven't been able to translate that belief into making money ;-)  This question is very complex and has to do not only with US policies and economy but with the status of the US currency in the world and the world economy in general.  The other saying that comes to mind in this context is that the market can remain irrational (and it certainly seems to be that) longer than you can remain solvent." Yes, bond funds are marked to market, so they will decline as the composition of their holdings will. Households actually have unimpressive relative levels of credit to equity holdings.  The reason why is because there is little return on credit, making it irrational to hold any amount greater than to fund future liquidity needs, risk adjusted and time discounted. The vast majority of credit is held by insurance companies.  Pension funds have large stakes as well.  Banks hold even fewer bonds since they try to sell them as soon as they've made them. Insurance companies are forced to hold a large percentage of their floats in credit then preferred equity.  While this dulls their returns, it's not a large problem for them because they typically hold bonds until maturity.  Only the ones who misprice the risk of insurance will have to sell at unfavorable prices. Being able to predict interest rates thus bond prices accurately would make one the best bond manager in the world.  While it does look like inflation will rise again soon just as it has during every other US expansion, can it be assured when commodity prices are high in real terms and look like they may be in a collapse?  The banking industry would have to produce credit at a much higher rate to counter the deflation of all physical goods. Households typically shun assets at low prices to pursue others at high prices, so their holdings of bonds ETFs should be expected to decline during a bond collapse.  If insurance companies find it less costly to hold ETFs then they will contribute to an increase in bond ETF supply. why would anyone buy a long-term bond fund in a market like this one,   where interest rates are practically bottomed out? 1) You are making the assumption that interest rates has bottom out hence there is no further possibility of it  going down further , i mean who expected Lehman Brother to go bankrupt 2) Long term investors who are able to wait for the bad times of the bond market to end and in the mean time dont mind some dividend payment of 2-3%
Bonds can increase in price, if the demand is high and offer solid yield if the demand is low.  For instance, Russian bond prices a year ago contracted big in price (ie: fell), but were paying 18% and made a solid buy.  Now that the demand has risen, the price is up with the yield for those early investors the same, though newer investors are receiving less yield (about 9ish percent) and paying higher prices.   I've rarely seen banks pay more variable interest than short term treasuries and the same holds true for long term CDs and long term treasuries.  This isn't to say it's impossible, just rare.  Also variable is different than a set term; if you buy a 10 year treasury at 18%, that means you get 18% for 10 years, even if interest rates fall four years later.   Think about the people buying 30 year US treasuries during 1980-1985.  Yowza. So if you have a very large amount of money you will store it in bonds as its much less likely that the US treasury will go bankrupt than your bank. Less likely?  I don't know about your bank, but my bank doesn't owe $19 trillion. One advantage not pointed out yet is that closed-end funds typically trade on stock exchanges, whereas mutual funds do not.  This makes closed-end funds more accessible to some investors. I'm a Canadian, and this particular distinction matters to me.  With my regular brokerage account, I can buy U.S. closed-end funds that trade on a stock exchange, but I cannot buy U.S. mutual funds, at least not without the added difficulty of somehow opening a brokerage account outside of my country. "The bond funds should tell you their duration. My 401(k) has similar choices, and right now, I'm at the short maturity, i.e. under 1 year. The current return is awful, but better than the drop the longer term funds will experience as rates come back up.  Not quite mathematically correct, but close enough, ""duration"" gives you the time-weighted average maturity in a way that tells you how the value responds to a rate change. If a fund has a 10 year duration, a .1% rate rise will cause the fund value to drop 1.0%." "Here are my reasons as to why bonds are considered to be a reasonable investment. While it is true that, on average over a sufficiently long period of time, stocks do have a high expected return, it is important to realize that bonds are a different type of financial instrument that stocks, and have features that are attractive to certain types of investors. The purpose of buying bonds is to convert a lump sum of currency into a series of future cash flows. This is in and of itself valuable to the issuer because they would prefer to have the lump sum today, rather than at some point in the future. So we generally don't say that we've ""lost"" the money, we say that we are purchasing a series of future payments, and we would only do this if it were more valuable to us than having the money in hand. Unlike stocks, where you are compensated with dividends and equity to take on the risks and rewards of ownership, and unlike a savings account (which is much different that a bond), where you are only being paid interest for the time value of your money while the bank lends it out at their risk, when you buy a bond you are putting your money at risk in order to provide financing to the issuer. It is also important to realize that there is a much higher risk that stocks will lose value, and you have to compare the risk-adjusted return, and not the nominal return, for stocks to the risk-adjusted return for bonds, since with investment-grade bonds there is generally a very low risk of default. While the returns being offered may not seem attractive to you individually, it is not reasonable to say that the returns offered by the issuer are insufficient in general, because both when the bonds are issued and then subsequently traded on a secondary market (which is done fairly easily), they function as a market. That is to say that sellers always want a higher price (resulting in a lower return), and buyers always want to receive a higher return (requiring a lower price). So while some sellers and buyers will be able to agree on a mutually acceptable price (such that a transaction occurs), there will almost always be some buyers and sellers who also do not enter into transactions because they are demanding a lower/higher price. The fact that a market exists indicates that enough investors are willing to accept the returns that are being offered by sellers. Bonds can be helpful in that as a class of assets, they are less risky than stocks. Additionally, bonds are paid back to investors ahead of equity, so in the case of a failing company or public entity, bondholders may be paid even if stockholders lose all their money. As a result, bonds can be a preferred way to make money on a company or government entity that is able to pay its bills, but has trouble generating any profits.  Some investors have specific reasons why they may prefer a lower risk over time to maximizing their returns. For example, a government or pension fund or a university may be aware of financial payments that they will be required to make in a particular year in the future, and may purchase bonds that mature in that year. They may not be willing to take the risk that in that year, the stock market will fall, which could force them to reduce their principal to make the payments. Other individual investors may be close to a significant life event that can be predicted, such as college or retirement, and may not want to take on the risk of stocks. In the case of very large investors such as national governments, they are often looking for capital preservation to hedge against inflation and forex risk, rather than to ""make money"". Additionally, it is important to remember that until relatively recently in the developed world, and still to this day in many developing countries, people have been willing to pay banks and financial institutions to hold their money, and in the context of the global bond market, there are many people around the world who are willing to buy bonds and receive a very low rate of return on T-Bills, for example, because they are considered a very safe investment due to the creditworthiness of the USA, as well as the stability of the dollar, especially if inflation is very high in the investor's home country. For example, I once lived in an African country where inflation was 60-80% per year. This means if I had $100 today, I could buy $100 worth of goods, but by next year, I might need $160 to buy the same goods I could buy for $100 today. So you can see why simply being able to preserve the value of my money in a bond denominated in USA currency would be valuable in that case, because the alternative is so bad. So not all bondholders want to be owners or make as much money as possible, some just want a safe place to put their money. Also, it is true for both stocks and bonds that you are trading a lump sum of money today for payments over time, although for stocks this is a different kind of payment (dividends), and you only get paid if the company makes money. This is not specific to bonds. In most other cases when a stock price appreciates, this is to reflect new information not previously known, or earnings retained by the company rather than paid out as dividends. Most of the financial instruments where you can ""make"" money immediately are speculative, where two people are betting against each other, and one has to lose money for the other to make money. Again, it's not reasonable to say that any type of financial instrument is the ""worst"". They function differently, serve different purposes, and have different features that may or may not fit your needs and preferences. You seem to be saying that you simply don't find bond returns high enough to be attractive to you. That may be true, since different people have different investment objectives, risk tolerance, and preference for having money now versus more money later. However, some of your statements don't seem to be supported by facts. For example, retail banks are not highly profitable as an industry, so they are not making thousands of times what they are paying you. They also need to pay all of their operating expenses, as well as account for default risk and inflation, out of the different between what they lend and what they pay to savings account holders. Also, it's not reasonable to say that bonds are worthless, as I've explained. The world disagrees with you. If they agreed with you, they would stop buying bonds, and the people who need financing would have to lower bond prices until people became interested again. That is part of how markets work. In fact, much of the reason that bond yields are so low right now is that there has been such high global demand for safe investments like bonds, especially from other nations, such that bond issues (especially the US government) have not needed to pay high yields in order to raise money." IMHO bonds are not a good investment at this present time, nor generally. Appreciate for a moment that the yield of an investment is DIRECTLY related to the face/trading value. If a thing (bond/stock) trades for $100 and yields 3%, it pays $3.  In the case of a bond, the bond doesn't pay a % amount, it pays a $ amount.  Meaning it pays $3. SO, for the yield to rise, what has to happen to the trading price?  It has to decrease. As of 2013/14 bonds are trading at historically LOW yields.  The logical implication of this is if a bond pays a fixed $ amount, the trading price of the bond has to have increased.  So if you buy bonds now, you will see a decrease in its face value over the long term. You may find the first tool I built at Simple Stock Search useful as you research potential investments. One thing to note before buying bond funds. The value of bonds you hold will drop when interest rates go up. Interest rates are at historical lows and pretty much have nowhere to go but up. If you are buying bonds to hold to maturity this is probably not a major concern, but for a bond fund it might impair performance if things suddenly shift in the interest rate market. Notes and Bonds sell at par (1.0). When rates go up, their value goes down. When rates go down, their value goes up. As an individual investor, you really don't have any business buying individual bonds unless you are holding them to maturity. Buy a short-duration bond fund or ETF. It has been hinted at in some other answers, but I want to say it explicitly: Volatility is not risk. Volatility is how much an investment goes up and down, risk is the chance that you will lose money. For example, stocks have relatively high volatility, but the risk that you will lose money over a 40 year period is virtually zero (in particular if you invest in index funds). Bonds, on the other hand, have basically no volatility (their cash flow is totally predictable if you trust the future of your government), but there is a significant risk that they will perform worse than stocks over a longer period. So, volatility equals risk only if you are day trading. A 401(k) is literally the opposite of that. For further reading: Never confuse risk and volatility Also, investing is not gambling. Gambling is bad because the odds are stacked against you. You need more than average luck to actually win and the longer you play, the more you will lose. Investing means buying productive capital that will produce further value. The odds are in your favor. Even if you do a moderately bad job at investing, the longer you stay, the more you will win. Not really. You can have two bonds that have identical duration but vastly different convexity.   Pensions and insurance portfolio managers are most common buyers as they're trying to deal with liability matching and high convexity allows them to create a barbell around their projected liabilities. Often times the commission fees add up a lot. Many times the mundane fluctuations in the stock market on a day to day basis are just white noise, whereas long term investing generally lets you appreciate value based on the market reactions to actual earnings of the company or basket of companies. Day trading often involves leverage as well. When it comes down to it, long-term investments pay better than short-term ones.  If nothing else, there's less administration and less financial risk for the provider.  That's why 2, 3 or 5 year savings accounts pay better than instant access ones. Higher-risk investments pay more interest (or dividends) than low-risk ones.  They have to, or nobody would invest in them. So by locking yourself out of any long term and/or risky investments, you're stuck with a choice of low-interest short term ones. There are plenty of investment funds that you can sell at short notice if you want to.  But they are volatile, and if you cash out at the wrong time, you can get back less than you invested.  The way you lower risk is either to invest in a fund that covers a broad range of investments, or invest in several different funds. "A fund is a portfolio, in that it is a collection, so the term is interchangeable for the most part.  Funds are made up of a combination of equities positions (i.e., stocks, bonds, etc.) plus some amount of un-invested cash. Most of the time, when people are talking about a ""fund"", they are describing what is really an investment strategy.  In other words, an example would be a ""Far East Agressive"" fund (just a made up name for illustration here), which focuses on investment opportunities in the Far East that have a higher level of risk than most other investments, thus they provide better returns for the investors.  The ""portfolio"" part of that is what the stocks are that the fund has purchased and is holding on behalf of its investors.  Other funds focus on municipal bonds or government bonds, and the list goes on. I hope this helps. Good luck!" AAA bonds are safe, as far as the principal goes. If you buy long term bonds today (at very low rates) and the interest rate goes up to 10% in 5 years, the current value of the bonds will decrease. But if you hold the bonds till maturity, you will almost certainly (barring MBS scenarios) get the expected principal and interest on the bonds. If you decide to sell a long-term bond before it matures, it will probably be worth less than you paid for it if interest rates have risen since you bought it. "For most people ""home ownership"" is a long term lifestyle strategy (i.e. the intention is to own a home for several decades, regardless of how many times one particular house might be ""swapped"" for a different one.  In an economic environment with steady monetary inflation, taking out a long-term loan backed by a tangible non-depreciating ""permanent"" asset (e.g. real estate) is in practice a form of investing not borrowing, because over time the monetary value of the asset will increase in line with inflation, but the size of the loan remains constant in money terms.  That strategy was always at risk in the short term because of temporary falls in house prices, but long-term inflation running at say 5% per year would cancel out even a 20% fall in house prices in 4 years. Downturns in the economy were often correlated with rises in the inflation rate, which fixed the short-term problem even faster. Car and student loans are an essentially different financial proposition, because you know from the start that the asset will not retain its value (unless you are ""investing in a vintage car"" rather than ""buying a means of personal transportation"", a new car will lose most of its monetary value within say 5 years) or there is no tangible asset at all (e.g. taking out a student loan, paying for a vacation trip by credit card, etc).  The ""scariness"" over home loans was the widespread realization that the rules of the game had been changed permanently, by the combination of an economic downturn plus national (or even international) financial policies designed to enforce low inflation rates - with the consequence that ""being underwater"" had been changed from a short term problem to a long-term one." First off, I do not recommend buying individual bonds yourself. Instead buy a bond fund (ETF or mutual fund). That way you get some diversification.  The risk-reward ratio will be evident in what you find to invest in. Junk bond funds pay the highest rates. Treasury bond funds pay the lowest. So you have to ask yourself how comfortable are you with risk?  Buy the funds that pay the highest rate but still let you sleep at night.