Over the long term, why invest in bonds?
"If I don't need this money for decades, meaning I can ride out periodical market crashes, why would I invest in bonds instead of funds that track broad stock market indexes? You wouldn't.  But you can never be 100% sure that you really won't need the money for decades.  Also, even if you don't need it for decades, you can never be 100% certain that the market will not be way down at the time, decades in the future, when you do need the money.  The amount of your portfolio you allocate to bonds (relative to stocks) can be seen as a measure of your desire to guard against that uncertainty. I don't think it's accurate to say that ""the general consensus is that your portfolio should at least be 25% in bonds"".  For a young investor with high risk tolerance, many would recommend less than that.  For instance, this page from T. Rowe Price suggests no more than 10% bonds for those in their 20s or 30s. Basically you would put money into bonds rather than stocks to reduce the volatility of your portfolio.  If you care only about maximizing return and don't care about volatility, then you don't have to invest in bonds.  But you probably actually do care about volatility, even if you don't think you do.  You might not care enough to put 25% in bonds, but you might care enough to put 10% in bonds." Bonds provide protections against stock market crashes, diversity and returns as the other posters have said but the primary reason to invest in bonds is to receive relatively guaranteed income. By that I mean you receive regular payments as long as the debtor doesn't go bankrupt and stop paying. Even when this happens, bondholders are the first in line to get paid from the sale of the business's assets. This also makes them less risky. Stocks don't guarantee income and shareholders are last in line to get paid. When a stock goes to zero, you lose everything, where as a bondholder will get some face value redemption to the notes issue price and still keep all the previous income payments. In addition, you can use your bond income to buy more shares of stock and increase your gains there. "I can think of a few reasons for this. First, bonds are not as correlated with the stock market so having some in your portfolio will reduce volatility by a bit. This is nice because it makes you panic less about the value changes in your portfolio when the stock market is acting up, and I'm sure that fund managers would rather you make less money consistently then more money in a more volatile way.  Secondly, you never know when you might need that money, and since stock market crashes tend to be correlated with people losing their jobs, it would be really unfortunate to have to sell off stocks when they are under-priced due to market shenanigans. The bond portion of your portfolio would be more likely to be stable and easier to sell to help you get through a rough patch. I have some investment money I don't plan to touch for 20 years and I have the bond portion set to 5-10% since I might as well go for a ""high growth"" position, but if you're more conservative, and might make withdrawals, it's better to have more in bonds... I definitely will switch over more into bonds when I get ready to retire-- I'd rather have slow consistent payments for my retirement than lose a lot in an unexpected crash at a bad time!" Many folks use bonds to diversify their portfolio since bonds rise and fall in value at different times and for different reasons than stocks. Bonds pay interest on a regular basis (usually monthly or quarterly) and so some people invest in bonds in order to match the interest payments to some regular expense they might have. The interest payment does not change (fixed income).  For individual bonds, there is a maturity date at which you can expect to receive the face value of the bond (the issuer's creditworthiness is important here). You can make a little money on a bond by buying it when its value is lower than its face value and either selling later for a higher value, or waiting for it to mature.  Often the minimum investment for a single bond is high, so if you don't have a large enough amount, you can still get the performance of bonds through a bond fund. These do not mature, so you don't have a guarantee of a return of your investment. However, they have access to more bonds than retail investors, so the funds can keep your money more fully invested. If you don't need the income, you can reinvest the dividends and have a little extra capital growth this way.
"First, congratulations on choosing to invest in low cost passively managed plans. If you choose any one of these options and stick with it, you will already be well ahead of most individual investors. Almost all plans will allow you to re-balance between asset classes. With some companies, sales agents will encourage you to sell your overweighted assets and buy underweighted assets as this generates brokerage commissions for them, but when you only need to make minor adjustments, you can simply change the allocation of the new money going into your account until you are back to your target weights. Most plans will let you do this for free, and in general, you will only need to do this every few years at most. I don't see much reason for you to be in the Target funds. The main feature of these plans is that they gradually shift you to a more conservative asset allocation over time, and are designed to prevent people who are close to retirement from being too aggressive and risking a major loss just before retirement. It's very likely that at your age, most plans will have very similar recommendations for your allocation, with equities at 80% or more, and this is unlikely to change for the next few decades. The main benefits of betterment seems to be simplicity and ease of use, but there is one concern I would have for you with betterment. Precisely because it is so easy to tweak your allocation, I'm concerned that you might hurt your long-term results by reacting to short-term market conditions: I know I said I wanted a hands off account, but what if the stock market crashes and I want to allocate more to bonds??? One of the biggest reasons that stock returns are better than bond returns on average is that you are being paid to accept additional risk, and living with significant ups and downs is part of what it means to be in the stock market. If you are tempted to take money out of an asset class when it has been ""losing/feels dangerous"" and put more in when it is ""winning/feels safe"", my concerns is that you will end up buying high and selling low. I'd recommend taking a look at this article on the emotional cycle of investing. My point is simply that it's very likely that if you are moving money in and out of stocks based on volatility, you're much less likely to get the full market return over the long term, and might be better off putting more weight in asset classes with lower volatility. Either way, I'd recommend taking one or more risk tolerance assessments online and making sure you're committed to sticking with a long-term plan that doesn't involve more risk than you can really live with. I tend to lean toward Vanguard Life Strategy simply because Vanguard as a company has been around longer, but betterment does seem very accessible to a new investor. Best of luck with your decision!" It wouldn't surprise me to see a country's return to show Inflation + 2-4%, on average. The members of this board are from all over the world, but those in a low inflation country, as the US,Canada, and Australia are right now, would be used to a long term return of 8-10%, with sub 2% inflation.  In your case, the 20% return is looking backwards, hindsight, and not a guarantee. Your country's 10 year bonds are just under 10%. The difference between the 10% gov bond and the 20% market return reflects the difference between a 'guaranteed' return vs a risky one.  Stocks and homes have different return profiles over the decades. A home tends to cost what some hour's pay per month can afford to finance.  (To explain - In the US, the median home cost will center around what the median earner can finance with about a week's pay per month. This is my own observation, and it tends to be correct in the long term. When median homes are too high or low compared to this, they must tend back toward equilibrium.)  Your home will grow in value according to my thesis, but an investment home has both value that can rise or fall, as well as the monthly rent. This provides total return as a stock had growth and dividends.  Regardless of country, I can't predict the future, only point out a potential flaw in your plan. First, you need to understand the difference in discussing types of investments and types of accounts. Certificate of Deposits (CDs), money market accounts, mutual funds, and stocks are all examples of types of investments. 401(k), IRA, Roth IRA, and taxable accounts are all examples of types of accounts. In general, those are separate decisions to make.  You can invest in any type of investment inside any type of account.  So your question really has two different parts:   Tax-advantaged retirement accounts vs. Standard taxable accounts FDIC-insured CDs vs. at-risk investments (such as stock mutual funds) Retirement accounts are special accounts allowed by the federal government that allow you to delay (or, in some cases, completely avoid) paying taxes on your investment.  The trade-off for these accounts is that, in general, you cannot access any of the money that you put into these accounts until you get to retirement age without paying a steep penalty.  These accounts exist to encourage citizens to save for their own retirement.  Examples of retirement accounts include 401(k) and IRAs. Standard taxable accounts have no tax advantages, but no restrictions, either.  You can put money in and take money out whenever you like.  However, anything that your investment earns is taxable each year. Inside any of these accounts, you can invest in FDIC-insured bank accounts, such as savings accounts or CDs, or you can invest in any number of non-insured investments, including money market accounts, bonds, mutual funds, stocks, precious metals, etc. Something you need to understand about investing in general is that your potential returns are directly related to the amount of risk that you take on.  Investing in an insured investment, which is guaranteed by the government to never lose its value, will result in the lowest potential investment returns that you can get. Interest-bearing savings accounts are currently paying less than 1% interest.  A CD will get you a slightly higher interest rate in exchange for you agreeing not to withdraw your money for a period of time. However, it takes a long time for your investments to grow with these investments.  If you are earning 1%, it takes 72 years for your investment to double. If you are willing to take some risk, you can earn much more with your investments.  Bonds are often considered quite safe; with a bond, you loan money to a government or corporation, and they pay you back with interest.  The risk comes from the possibility that the government or corporation won't pay you back, so it is important to choose a bond from an entity that you trust. Stocks are shares in for-profit companies.  Your potential investment gain is unlimited, but it is risky, as stocks can go down in value, and companies can close.  However, it is important to note that if you take the largest 500 stocks together (S&P 500), the average value has consistently gone up over the long term.  In the last 35 years, this average value has gone up about 11%.  At this rate, your investment would double in less than 7 years. To avoid the risk of picking a losing stock, you can invest in a mutual fund, which is a collection of stocks, bonds, or other investments.  The idea is that you can, with one investment, invest in many stocks, essentially earning the average performance of all the stocks.  There is still risk, as the market can be down as a whole, but you are insulated from any one stock being bad because you are diversified. If you are investing for something in the long-term future, such as retirement, stock mutual funds provide a good rate of return at an acceptably-low level of risk, in my opinion. "I feel that OP's question is fundamentally wrong and an understanding of why is important. The stock market, as a whole, in the USA has an average annualized return of 11%. That means that a monkey, throwing darts at a board, can usually turn 100K into over three million in thirty-five years. (The analog I'm drawing is a 30-year old with 100K randomly picking stocks will be a multi-millionaire at 65). So to be ""good"" at investing in the stock market, you need to be better than a monkey. Most people aren't. Why? What mistakes do people make and how do you avoid them? A very common mistake is to buy high, sell low. This happened before and after the 08's recession. People rushed into the market beforehand as it was reaching its peak, sold when the market bottomed out then ignored the market in years it was getting 20+% returns. A Bogle approach for this is to simply consistently put a  part of your income into the market whether it is raining or shining. Paying high fees. Going back to the monkey example, if the monkey charges you a 2% management fees, which is low by Canadian standards, the monkey will cost you one million dollars over the course of the thirty-five years. If the monkey does a pretty good job it is a worthy expenditure. But most humans, including professional stock pickers, are worst than a monkey at picking stocks. Another mistake is adjusting your plan. Many people, when the market was giving bull returns before the 08's crash happily had a large segment of their wealth in stocks. They thought they were risk tolerant. Crash happened, they moved towards bonds. Then bonds returns were comically low while stocks soared. Had they had a plan, almost any consistent plan, they'd have done better. Another genre of issues is just doing stupid things. Don't buy that penny stock. Don't trade like crazy. Don't pay 5$ commission on a 200$ stock order. Don't fail to file your taxes.  Another mistake, and this burdens a lot of people, is that your long-term investments are for long-term investing. What a novel idea. You're 401K doesn't exist for you to get a loan for a home. Many people do liquidate their long-term savings. Don't. Especially since people who do make these loans or say ""I'll pay myself back later"" don't." The 1-yr bond has a higher interest rate, but it's only guaranteed for a year. This means it is subject to reinvestment risk.  Suppose you're investing in 1981. Which sounds better? I've not looked up the precise interest rates but I'm guessing the former option leaves you with more money in 1991. It should be no surprise that investors were willing to pay more for it++, even if they couldn't have been totally sure in advance. :) (++ Remember, a bond is like a coupon for a certain percentage off of future-money. If the coupon offers you fewer percent off, you're paying more present-money for each dollar of future-money you buy.) Yeah my question was just out of curiosity. Though I do wonder, given that bond prices are so low, they inevitably will have to go up right? So why does anyone bother to buy them in the first place? "The federal funds rate is one of the risk-free short-term rates in the economy. We often think of fixed income securities as paying this rate plus some premia associated with risk. For a treasury security, we can think this way: (interest rate) = (fed funds rate) + (term premium) The term premium is a bit extra the bond pays because if you hold a long term bond, you are exposed to interest rate risk, which is the risk that rates will generally rise after you buy, making your bond worth less.  The relation is more complex if people have expectations of future rate moves, but this is the general idea.  Anyway, generally speaking, longer term bonds are exposed to more interest rate risk, so they pay more, on average. For a corporate bond, we think this way: (interest rate) = (fed funds rate) + (term premium) + (default premium) where the default premium is some extra that the bond must pay to compensate the holder for default risk, which is the risk that the bond defaults or loses value as the company's prospects fall.  You can see that corporate and government bonds are affected the same way (approximately, this is all hand-waving) by changes in the fed funds rate. Now, that all refers to the rates on new bonds.  After a bond is issued, its value falls if rates rise because new bonds are relatively more attractive.  Its value rises if rates on new bonds falls.  So if there is an unexpected rise in the fed funds rate and you are holding a bond, you will be sad, especially if it is a long term bond (doesn't matter if it's corporate or government).  Ask yourself, though, whether an increase in fed funds will be unexpected at this point.  If the increase was expected, it will already be priced in.  Are you more of an expert than the folks on wall-street at predicting interest rate changes?  If not, it might not make sense to make decisions based on your belief about where rates are going.  Just saying. Brick points out that treasuries are tax advantaged.  That is, you don't have to pay state income tax on them (but you do pay federal). If you live in a state where this is true, this may matter to you a little bit. They also pay unnaturally little because they are convenient for use as a cash substitute in transactions and margining (""convenience yield"").  In general, treasuries just don't pay much.  Young folk like you tend to buy corporate bonds instead, so they can make money on the default and term premia." I let someone else pick and chose which junk bonds to buy and which to sell. So instead of holding individual bonds in my portfolio I hold an ETF that is managed by a man with a PHD and which buys junk bonds.   I get a yearly 15.5% ROI, paid monthly.  Buy and hold and you can get a good return for the rest of your life. It is only speculation when you sell.