There is much talk these days about the future of bond funds because interest rates will likely rise resulting in potential losses in bond funds.
Craig L. Israelsen in a Financial-Planning.com magazine article entitled The Rebalance Premium (June 2011) reminds us that "...bond funds seldom have had negative annual returns, while stock funds lost money in a calendar year nearly 30% of the time..."
Do not lose sight of the importance of cash and bonds to stabilize a portfolio.
"...over the 85-year period from 1926 to 2010...bonds had a negative annual return on eight occasions, about 9% of the time..."
More importantly, using Ibbotson U.S. Intermediate-Term Government Bond Index, "...the losses were relatively small, never exceeding 3%. Over the same period, stocks were in the red 24 times, or 28% of the time. Six of the annual losses exceeded 20%...."
He further drives home the point, looking at 3-year returns over this 85-year period, "...the worst three-year slide for the S&P 500 was a 61% free fall, but for bonds the worst cumulative return over any three-year period was 1.6%..." (yes, less than 2%).
As the article reminds us, this illustrates "...the pragmatic difference between stocks and bonds..."