Free Beating the Street by Peter Lynch

the percentage of assets invested in stocks, which is a step in the right direction.
BONDS VERSUS BOND FUNDS
    The mix of assets having been decided, the next step is to figure out how to invest the bond portion. I’m no bond fan, which explains why this discussion is going to be short. That I’d rather be touting stocks should be apparent by now, but I’ll put aside my favorite subject to say something about bonds as a safe place to keep your money. They aren’t.
    People who sleep better at night because they own bonds and not stocks are susceptible to rude awakenings. A 30-year Treasury bond that pays 8 percent interest is safe only if we have 30 years of low inflation. If inflation returns to double digits, the resale value of an 8 percent bond will fall by 20–30 percent, if not more. In such a case, if you sell the bond, you lose money. If you hold on to it for the entire 30 years you’re guaranteed to get your money back, but that money (the principal) will be worth only a fraction of what it’s worth today. Unlike wine and baseball cards, money is cheapened with age. For example, the 1992 dollar is worth one third of its 1962 ancestor.
    (It’s interesting to note that at present the much-disparaged money-market fund is not necessarily the disaster it’s made out to be. With inflation at 2.5 percent and the money markets paying 3.5 percent, at least you’re 1 percent ahead of the game. If interest rates rise, so will the money-market yields. I’m not saying you can live on a 3.5 percent return, but in the money market at least you run no risk of losing your capital. The low-fee money-market funds now offered by several investment houses have made this product more attractive. And since low interest rates are not likely to last forever, this is a far safer place to be invested than long-term bonds.)
    Another fallacy about bonds is that it’s safer to buy them in a fund. No doubt it is, if you’re talking about corporate bonds or low-rated junk bonds, because a fund can limit the risk of default by investing in a variety of issues. But a bond fund offers no protection against higher interest rates, which is by far the greatest danger inowning a long-term IOU. When rates go higher, a bond fund loses value as quickly as an individual bond with a similar maturity.
    You can make a halfway decent case for investing in a junk-bond fund, or in a blended fund that offers a mix of corporate and government paper that produces a better overall yield than you could get from investing in a lone bond. What I can’t figure out is why anybody would want to invest all his money in an intermediate- or long-term government bond fund. A lot of people do. More than $100 billion is invested in government bond funds today.
    I may lose some friends in the bond-fund department for saying this, but their purpose in life eludes me. Anyone who buys an intermediate-term government bond fund and pays the .75 percent in annual expenses for salaries, accounting fees, the cost of producing reports, etc., could just as easily buy a 7-year Treasury bond, pay no fee, and get a higher return.
    Treasury bonds and bills can be purchased through a broker, or directly from a Federal Reserve bank, which charges no commission. You can buy a 3-year note, or T-bill, for as little as $5,000 and a 10-year or 30-year Treasury bond for as little as $1,000. The interest on the T-bill is paid up front, and the interest on the bond is automatically deposited in your brokerage account or your bank account. There’s no fuss.
    The promoters of government-bond funds like to argue that expert managers can get you a better return via their well-timed buying, selling, and hedging of positions. Apparently, this doesn’t happen very often. A study done by the New York bond dealer Gabriele, Hueglin & Cashman concludes that in a six-year period from 1980 to 1986, bond funds were consistently outperformed by individual