As we look back on the stock market's recent "lost decade," one investing lesson we learned (or should have learned) going forward is that owning a portfolio of just equities can, in fact, be a bad thing.

Sure, equities have historically been the best-performing asset class over the long term, but since we all have finite time horizons that reluctantly shrink with each passing year, we can't count on rolling 50-year returns when we may only have 10 years to retirement.

As we witnessed last year, one abnormally bad year can set your savings back a full decade -- and sometimes the damage is irreparable. The emotional by-products of such a terrible year of performance -- desperation, anger, capitulation -- often only compound the problem.

Fortunately, you don't have to risk it all in equities to comfortably build yourself a sizable nest egg. In fact, the remedy is quite simple: Own more bonds. It's the best investment you can make today.  

Bonds? Seriously?
On the whole, American investors of all ages don't own enough bonds. A 2008 survey from the Investment Company Institute revealed the scary truth:

Bond Portfolio Share

Investors < 40 years

Investors 40 to 60

Investors > 65 years

More than 50%




31% to 50%




11% to 30%




1% to 10%









While you might expect younger investors to have less fixed-income exposure, incredibly, nearly a third of investors 65 and older still have no bond exposure whatsoever -- and more than 80% of them have allocated less than 30% of their portfolio to bonds.

Based on this data, then, it's no surprise that it's been a very rocky year for investors of all ages, but particularly for seniors already in or quickly approaching retirement.

It didn't have to be that way
While bonds are much less exciting than stocks, dedicating a portion of your portfolio to bonds shouldn't be seen as boring or cowardly -- that is, unless you really enjoy seeing large chunks of your portfolio evaporate in a year.

Consider the success realized by the Vanguard Wellington Fund (VWELX) over its rich 80-year history. Since its launch in 1929, Wellington has always held between 30% and 60% bonds in addition to stocks (currently it's a 62% stock / 38% bond mix). According to Vanguard, it "has historically provided more than 80% of the return of the U.S. stock market with less risk."

At the fund's 75th anniversary in 2004, Vanguard founder Jack Bogle noted that Wellington's original objectives of "conservation of capital, reasonable current income, and profits without undue risk" have "stood the test of time."

Indeed they have. From July 1, 1929, through the end of 2008, Wellington has posted incredible 8% annualized returns -- far more incredible when you consider the bubble in which it was born and the Depression in which it subsisted for the next 10 years. To put that success into further perspective, the Dow Jones Industrial Average has grown a paltry 4.1% since Wellington's inception.

Even in the most recent decade, Wellington has continued to more than hold its own against Vanguard's flagship S&P 500-tracking 500 Index (VFINX):



500 Index

1 Year



3 Year



5 Year



10 Year



Source:, as of Dec. 31, 2008.

What's its secret?
Wellington's ability to consistently generate solid returns with less risk speaks volumes about the need for both stocks and bonds in your portfolio.

The stocks in the Wellington fund are generally large, mostly U.S.-based, dividend payers. Among the current top stock holdings, you'll find names like:


% of Assets



Chevron (NYSE:CVX)


ExxonMobil (NYSE:XOM)




Eli Lilly (NYSE:LLY)


General Electric (NYSE:GE)


Wal-Mart (NYSE:WMT)


Source:, as of Dec. 31, 2008.

Pairing these blue-chip dividend stalwarts with investment-grade corporate, Treasury, government agency, and yes, some mortgage-backed security bonds gives the fund's owners the best of both worlds -- the capital growth of stocks with the capital-preserving qualities of bonds. With a balanced approach like this, you may not beat the market in up years, but you won't lose as much in down years, either.

Word is bond
Keeping the past year's volatility in mind, there's truly something to be said for smoother returns, and owning more bonds can help you achieve this objective.

But before you rush out on your quest for bonds, remember that, like the stock market, the bond market can be complicated. In fact, the U.S. bond market is almost twice the size of the U.S. stock market, so before you dive in, it pays to not only know what percentage of your portfolio to allocate to bonds, but also what type of bonds you'd want -- high-yield "junk," TIPS, investment-grade, etc. For the average investor, your best bet is to gain bond exposure through bond-based mutual funds and ETFs.

At our Motley Fool Rule Your Retirement service, advisor Robert Brokamp has created model portfolios consisting of both stocks and bonds for investors of all ages. If you'd like to learn more about the ways bonds should fit in your portfolio, consider a 30-day free trial to Rule Your Retirement. Just click here to get started -- there's no obligation to subscribe.

Todd Wenning is a proud supporter of the Chico's Bail Bonds little league baseball team. He does not own shares of any company mentioned. Wal-Mart Stores is a Motley Fool Inside Value selection. The Fool's disclosure policy pays interest daily.