A general rule of thumb in investing is that while higher-risk investments are generally more volatile, they also tend to deliver higher returns over time. The longer-term results in the bond market bear that out: in the ten years ended on December 31, the best-performing market segment was emerging market bonds, with an average annual total return of 10.98% - better than all other major asset classes with the exception of emerging market stocks, which averaged a blistering 16.52% gain per year. High yield bonds finished a close second within the fixed-income space, averaging a gain of 10.24% per year. While both emerging market and high yield bonds have had their share of tough periods in this ten-year interval - most notable 2008, when high yield lost over 17% - investors who stuck with both areas were well-rewarded for taking the added risks.
Another important lesson that can be gleaned from the long-term performance data is that diversification indeed pays off. While emerging markets led the pack in the ten-year period, the best-performing asset class in the past five years was long-term investment grade corporate bonds, with an average annual gain of 10.41%. And in the three-year period, the winner was long-term U.S. Treasuries, with a gain of 13.62%. The lesson: it pays to be as diversified as possible, because it's impossible to tell what area of the market will lead in a given time frame.