For years, booming stocks had your portfolio purring like a kitten. In the back of your mind, though, you knew the markets could turn around and bite you. And if you needed a reminder of how much risk stocks have, this year has certainly provided one.

Watching the major market indexes drop as much as 50% in just a year -- with a sizeable portion of those losses coming during just the past few months -- hasn't been easy to stomach. But as much as the plummeting stock market shocked investors, the most surprising loser of 2008 is in an entirely different asset class entirely.

It's the corporate bond market.

When conservative investments aren't
This month's brand-new issue of our mutual fund newsletter service, Motley Fool Champion Funds, takes a look at the tremors that have shaken up the entire corporate bond market. As lead advisor Amanda Kish points out, investors who expected a smoother ride in their bond portfolios have discovered that some funds are experiencing big losses -- more than 20% in some cases.

True, the funds taking the biggest losses invest in high-yield corporate bonds -- also known as junk bonds. Although some investors undoubtedly got in over their heads chasing the higher income these funds offer, they should have expected that a stock market implosion would hurt junk bonds as well.

But the losses don't stop there. Even more traditional corporate bond funds, holding much higher-quality debt in their portfolios, have seen losses -- at a time when the Treasury bond market has gone in the opposite direction, paying huge rewards to investors.

To get an idea of just how big the disparities are, look at a sample of corporate funds versus their Treasury counterparts:

Corporate Fund

YTD Return

Treasury Counterpart

YTD Return

Vanguard Long-Term Investment Grade (VWESX)


Vanguard Long-Term Treasury (VUSTX)


Vanguard Intermediate-Term Investment Grade (VFICX)


Vanguard Intermediate-Term Treasury (VFITX)


Fidelity Investment Grade Bond Fund (FBNDX)


Fidelity Government Bond Fund (FGOVX)


Sources: Vanguard, Morningstar. Returns as of Nov. 25.

The difference is almost unbelievable. And the corporate bond funds we're talking about here don't hold junk; they hold bonds from well-known names, many of which still have fairly strong credit despite the recent crisis:

Corporate Fund

Issuers Among Top Holdings

Vanguard Long-Term Investment Grade (VWESX)


Vanguard Intermediate-Term Investment Grade (VFICX)

Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), Nordstrom (NYSE:JWN)

Fidelity Investment Grade Bond Fund (FBNDX)

ConocoPhillips (NYSE:COP), Wells Fargo (NYSE:WFC)

Source: Morningstar.

Unfortunately, the obvious lesson -- that even high-grade bond funds carry significant risk -- is one that many people didn't truly understand until this year. And even though some advisors are talking about how a higher bond allocation would have protected investors from the brunt of the stock market crash, people who invested the more conservative part of their portfolios in corporate bonds rather than Treasuries haven't gotten much benefit from their diversification this year.

What now?
Given that corporate bond fund returns have stunned investors, should you get those funds out of your portfolios now? The answer depends on how much you own, and what your investment objectives are.

Keeping all of your money in only a few stocks is risky, but so is putting most of your money into one part of the bond market. Although Treasuries are safe, their low yields leave you more exposed to the risk of higher interest rates down the road. In contrast, corporate bonds offer more income -- but at the price of possible default, especially if the economy suffers through a long recession.

The right mix of Treasuries and corporates can help you balance these risks while you maximize your income. That's why the model portfolios you'll find in the Champion Funds newsletter include bond funds that own a variety of different types of bonds.

You can see those model portfolios, along with commentary about the bond funds inside them, in this month's issue, which is available online today at 4 pm ET. And although Champion Funds is a paid service, we're offering you a free look as part of a 30-day trial subscription. Give it a try, and don't let the markets give you any more nasty surprises.

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Fool contributor Dan Caplinger has held his bond funds throughout the year. He owns shares of Berkshire Hathaway. Wal-Mart and Berkshire Hathaway are Motley Fool Inside Value recommendations. Berkshire Hathaway is a Motley Fool Stock Advisor selection. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy avoids surprises.