GENERALLY CONSIDERED THE MORE BORING, conservative part of an investor’s portfolio, bonds typically don’t get as much press as stocks do. And because they function differently from stocks and come in so many different flavors—Treasuries, municipals, corporate, high yield, etc.—they can be confusing. In the video above, Matthew Diczok, head of Fixed Income Investing for Merrill Lynch Wealth Management, offers a clear, simple explanation of how bonds work and why they should be considered an important part of an investor’s strategy.
A well-diversified portfolio should include a mix of stocks, bonds and cash (the three major asset classes). How much of each you hold depends on your financial goals, risk tolerance, time horizon and liquidity, or cash, needs. When it comes to bonds (also referred to as fixed income), there’s a general rule of thumb: The more conservative you are as an investor, the more bonds you may want to own, relative to stocks (also known as equities). If you’re willing to accept a greater amount of risk—and have a longer time horizon to reach your investment goals—you may be more comfortable leaning more heavily into stocks than toward bonds.
Watch our video and then check out our slideshow below to find a recommended asset allocation based on the type of investor you are. Our easy-to-use questionnaire, Identifying Your Allocation Profile, can help you determine your investor type. And be sure to speak with your financial advisor about any adjustments you might want to make to your long-term financial strategy
3 Questions to Ask Your Advisor
- Which types of bonds are best suited for my particular financial goals?
- Could bonds provide some stability to my investments when stocks are volatile?
- How can I use the bonds portion of my portfolio to generate more investment income?
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Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.