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The Case for Minimizing Risk in Your Bond Holdings 

October 20, 2015

William J. Bernstein, The Wall Street Journal

The sky didn’t fall, after all.

At its September policy meeting, the Federal Reserve decided not to raise interest rates. Had it done so, higher rates would have translated into a loss of principal, at least on paper, for bondholders. (When interest rates rise, bond prices fall.)

But the apparently misplaced obsession with the Fed misses a larger point: A substantial rate rise isn’t the only way bonds can bite you. The other major danger is credit risk—that is, the possibility of default. And in my opinion, this is just as serious a threat to your nest egg.

Over the very long term, the markets reward taking credit risk, but not by nearly as much as you might think. From the start of 1926 to Sept. 30, 2015, for example, long-term corporate bonds returned an annualized 6.00% on average, compared with 5.62% for safer long-term U.S. government bonds.

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