How to Choose a Bond Mutual Fund: It's Not as Hard as You Thought

For a long time it was too easy for investors to turn up their noses at bonds. But last year we got a wake-up call.

In 2000, bond funds outperformed stock funds by a healthy margin, with taxable bond funds gaining an average of 5.7%, according to Lipper, while tax-exempt funds saw average increases of 10.1%. Meanwhile, equity funds fell an average of 4.5%.

"The year just ended is a classic case of seeing bonds being one source of gain when everything else was going down," says David Yeske, a San Francisco-based certified financial planner. Granted, bond outperformance is relatively rare -- according to Lipper, last year was the first time fixed-income funds had bested their equity counterparts since 1994, and only the seventh time in the past 25 years. ...