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Market Decode: How Bonds Work—and What They Can Do for You

Watch this video to get the basics on this key ingredient in a well-diversified portfolio

 

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, fixed income strategist for the Chief Investment Office at Merrill and Bank of America Private Bank, 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 with stocks than with 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. And be sure to speak with your financial advisor about any adjustments you might want to make to your long-term financial strategy.

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Graphic showing a pie chart with a sample asset allocation. The text reads: What Kind of Investor Are You? Conservative—16% cash, 26% stocks and 58% bonds. The source for the sample allocation is the Chief Investment Office, based on data from January 2020. Disclaimer: The strategic allocations shown here are designed as guidelines for a 25-year investment horizon for investors with the highest level of liquidity needs.

Note: These allocations may be subject to change based on periodic review and are for illustrative purposes only. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.

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Graphic showing a pie chart with a sample asset allocation. The text reads: What Kind of Investor Are You? Moderately Conservative—2% cash, 43% stocks and 55% bonds. The source for the sample allocation is the Chief Investment Office, based on data from January 2020. Disclaimer: The strategic allocations shown here are designed as guidelines for a 25-year investment horizon for investors with the highest level of liquidity needs.
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Graphic showing a pie chart with a sample asset allocation. The text reads: What Kind of Investor Are You? Moderate—2% cash, 59% stocks and 39% bonds. The source for the sample allocation is the Chief Investment Office, based on data from January 2020. Disclaimer: The strategic allocations shown here are designed as guidelines for a 25-year investment horizon for investors with the highest level of liquidity needs.
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Graphic showing a pie chart with a sample asset allocation. The text reads: What Kind of Investor Are You? Moderately Aggressive—2% cash, 74% stocks and 24% bonds. The source for the sample allocation is the Chief Investment Office, based on data from January 2020. Disclaimer: The strategic allocations shown here are designed as guidelines for a 25-year investment horizon for investors with the highest level of liquidity needs.
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Graphic showing a pie chart with a sample asset allocation. The text reads: What Kind of Investor Are You? Aggressive—2% cash, 88% stocks and 10% bonds. The source for the sample allocation is the Chief Investment Office, based on data from January 2020. Disclaimer: The strategic allocations shown here are designed as guidelines for a 25-year investment horizon for investors with the highest level of liquidity needs.

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Global Wealth & Investment Management (GWIM) is a division of Bank of America Corporation. The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for GWIM clients, is part of the Investment Solutions Group (ISG) of GWIM.

Merrill, through the Chief Investment Office (CIO), has developed asset allocation models for investment guidance that are based on various risk tolerance and time horizon metrics. These asset allocation models and guidance are subject to change as market conditions change in the future. Asset allocation does not assure a profit, protect against a loss, and cannot eliminate the risk of fluctuating prices and uncertain returns in declining markets.

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.

Merrill, its affiliates, and advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisor before making any financial decisions.

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