Diversification

• Stocks are generally considered riskier than bonds, so bonds are often used for diversification and to add stability to an investment portfolio. Since current income or capital appreciation is secondary, the strategy with bonds can vary greatly and will depend on investor preferences and situation, with the primary goal being to complement and balance the stock portfolio.
  
  

High Current Income

• Investors who need high current income may look at lower-rated (junk) bonds that have higher yields. However, a higher yield comes with a higher risk of default. The strategy here would be to achieve maximum current income by investing in the highest-yielding bonds of multiple issuers in multiple industries and of varying maturities while paying attention to credit ratings and earnings news.
  
  

Capital Appreciation

• Bond prices fluctuate with economic conditions and interest rates, but every once in a while, prices of a particular bond or bond group can be depressed beyond any reasonable valuation due to unusual circumstances. Buying distressed bonds is risky but can produce substantial gains. For example, in 2009, when GM and Chrysler went bankrupt and sought government bailouts, Ford kept reiterating that it had a plan to survive and restructure without government money. But investors were scared of all auto manufacturers' bonds, so Ford bonds could be bought for 40 cents on the dollar. A year later, Ford bonds were trading at over 100 cents on the dollar. The strategy here would be to seek out special situations and invest in undervalued bonds that are likely to recover and appreciate in value.
  
  

Safety

• Conservative investors or investors with sufficient assets may be primarily concerned with preserving principal while seeking reasonable income. The strategy here may be to buy bonds with the highest credit ratings, such as U.S. government bonds or high-quality corporate bonds issued by blue-chip companies such as Boeing or Walmart.
  
  

Tax-Free Income

• Investors in high tax brackets may be primarily concerned with lowering their taxes. The strategy here would be to seek maximum tax relief by investing in tax-free (municipal) bonds. The credit quality (and safety) of municipal bonds can vary greatly, so specific bond selection would be based on investor risk profile and preferences.
  
  

Target Dates

• Many people need money by a particular date--for example, to pay tuition fees. The strategy here would be to buy bonds that mature by a specific date to ensure that the exact amount of money will be available. Interest income is a secondary consideration.
  
  Investors in this category may consider zero-coupon bonds. Zero-coupon bonds do not pay current income but are sold at a deep discount to the face value. The income an investor receives is the difference between the full face value he receives at maturity and the price he paid for the bond.