Why Bonds Should Be a Staple, No Matter Your Portfolio

With the recent volatility in financial markets, some investors are finally seeing the diversification benefit of holding fixed income in their portfolios alongside their riskier equity investments. In the current bull market – the longest one in history – it is easy to look at the allocation to bonds as nothing more than a drag on performance. However, as this article explores, there are many reasons why these less risky fixed income investments are an important staple in anyone’s investment portfolio. Bonds tend to act as “safe-havens” and usually perform well during times where equity or other risky investments are performing poorly. This negative correlation adds stability to your investments. Combining two or more relatively uncorrelated asset classes with positive expected returns will generally make a more efficient portfolio, one with a higher expected return per unit of risk. This isn’t just important for investors near or in retirement, but rather for all investors, as this added stability can allow you to take more risk elsewhere or even apply leverage judiciously. As the saying goes: “Stocks let us eat well. Bonds let us sleep well.”