After all, yields have been relatively paltry, with coupon interest on a 30-year Treasury now amounting to around 6%, which pales in comparison to the double-digit returns investors have been earning in the stock market.

Normally, you'd say, "Yes, but bonds are safer than stocks. You're less likely to lose principal." But you'd be wrong.

Bonds have posted as many years of negative total returns in the past three decades as small-company stocks, which have long been considered the most speculative and volatile of traditional domestic investments, according to Ibbotson Associates, a Chicago-based market research and consulting firm.

Yet bonds--or at least some type of fixed-income investment, ranging from long-term corporate bonds to shorter-term government notes, bills, money markets and certificates of deposit--are a must for most investor portfolios. Why? Fixed-income instruments address certain financial goals better than any other investment.

And, despite the prevalent urge to act as if investing is a high-stakes contest in which the winners post the highest gains, addressing your personal financial goals is the name of the game. Investing is nothing more than the means to that end.

The fact is, while U.S. stocks have posted higher average annual returns than any other type of financial asset over long periods of time, they're a miserable place to put short- and medium-term money, says Judith Martindale, a fee-only financial planner from San Luis Obispo.

That's because stock prices gyrate wildly in short periods of time. And, sometimes prices can stay down for periods ranging from five to 15 years. If the money you're investing is aimed at satisfying an important goal in the meantime, you're out of luck.

But fixed-income instruments are ideal to address those short- and medium-term goals for a simple reason: 90% of the return on a fixed-income instrument comes from the "coupon," or interest paid on your initial investment--not price appreciation, notes Kenneth J. Taubes, co-director of the fixed-income group at Pioneer Investment Management in Boston.

That makes them perfect for people who need to generate cash from their investments to supplement their monthly income. And it makes them a perfect investment for someone with an important goal that must be satisfied with a set amount of cash within five years or so.

The type of fixed-income investment that best serves your needs will depend on your income and circumstances, experts note.

For instance, if you need current income, you may want to take a look at corporate bonds or, if you're in a high tax bracket, tax-free municipals. Both offer better after-tax returns than U.S. government securities, the bellwether bond noted for its promise of complete security for your principal if you hold the bond to maturity.

Thirty-year Treasury bonds currently yield about 6%. Meanwhile, some higher- and medium-risk corporate bonds yield 8% and more. Those better returns mean you can live more comfortably--it's the difference between getting $6,000 annually on your $100,000 investment and getting $8,000, or even $10,000. But you have to recognize that they also pose more risk to your principal. After all, it's more likely that a company will have difficulty paying its bills and bondholders than the U.S. government, which can raise taxes or easily borrow more if it falls short of cash.

As a result, experts suggest that if you invest in corporate bonds, do it through a mutual fund, where you'll get wide diversification and the benefit of professional management and clout. (When bond-issuing companies get into hot water, they often invite their biggest investors to the table to help work out a repayment plan. Individuals rarely get such invitations and usually lack the skill and clout to make the most of such meetings if they did.)

Municipal bonds, which are issued by state and local governments and agencies, offer less generous interest rates than corporate bonds, but you get to keep all the money. Most types of municipal bonds are exempt from federal income tax, and--for in-state residents--state taxes as well. For someone in the highest tax brackets, it doesn't take much return to make this a great deal.

Consider this: For those in a combined marginal tax bracket of 45%--this would apply to Californians earning upward of $250,000 per year--getting a 5% tax-free return is the equivalent of getting a 9.09% return on a taxable bond.

How so? If this investor plopped $10,000 into a bond returning 9.09%, he'd come away with $909 at year-end. However, then he'd have to pay 45% of that--$409--to federal and state taxing authorities. That leaves him with just $500--or a 5% after-tax yield on his investment. That 9.09% is called the "taxable equivalent yield" and it is the basis by which municipal bonds are usually sold. (To figure a taxable equivalent yield, divide the interest rate by the inverse of your combined state and federal tax rate. You can estimate, since a percentage point or two won't matter much. In the above example, that means you divide 5 by .55--1 minus the 45% (.45) combined tax rate--to get 9.09.)

Meanwhile, if you've got a child going to college in a year or two and you need most of the first year's tuition money ready and available without risk to your principal, you'd be better served with a money market account. Money markets offer relatively paltry yields, but they invest in short-term government and corporate securities that are both safe and easily accessible. That makes such accounts, which can be opened with mutual funds or banks, ideal places to park short-term money that you can't afford to lose.

---------- END TABLE -->