With the stock market performing well in recent years and interest rates at historically low levels, it can be easy to forget about the benefits of fixed-income investments. However, identifying and maintaining the right mix of stocks and bonds is one of the most important investment decisions you can make.
Whether you own bond mutual funds, exchange-traded funds (ETFs), unit investment trusts (UITs) or individual bonds, fixed-income investments can help provide the following important benefits for your portfolio:
Bond prices tend to move in different directions from stock prices, especially during stock market downturns. This relationship can help improve your portfolio’s return potential relative to the risk assumed. However, it’s important to note that high-yield or “junk” bonds generally provide fewer diversification benefits than investment-grade bonds.
All investments have risks, but bonds are generally less risky than stocks because they typically fluctuate less in value, which can reduce risk in your portfolio. As a result, bonds can help provide stability in the value of your portfolio.
Most bonds pay regular interest payments that can be a steady source of income. This may become more important as you approach retirement. If you don’t need the income currently, you can choose to reinvest these payments. As a word of caution, while high-yield bonds may offer more income, they also generally carry more risk.
While you can’t control the markets, you can control your investment mix. This is why we suggest that you review your portfolio regularly with your financial advisor. Since stocks have done well over the past few years, they may now be a bigger part of your portfolio than you intended – and you may need to rebalance your portfolio to the mix that’s right for you.
Diversification does not ensure a profit or protect against loss.
Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.