Fixed income securities (bonds) are a fundamental part of an investing plan for most investors. There are many types of bonds along with varied approaches to fixed income investing, each with their own advantages and levels of risk. Although stocks have historically outperformed bonds over the long term, there are a number of reasons to include fixed income investments in a diversified portfolio, including:
- Income
Fixed income generally offers higher yields than equities or other securities as well as regular coupon payments, providing bond owners a potentially attractive, regular income stream. - Capital Preservation
Some investors may not want to take a significant amount of risk with their portfolios. Bond prices, especially those of high-quality bonds, tend to be less volatile than other securities, typically offering investors a lower risk profile. - Diversification
Fixed income securities have historically demonstrated a low correlation to equities, meaning there is little relationship between how the two asset classes have performed over a given time. Therefore, owning fixed income securities along with equities adds a potential risk-reducing effect to an investor’s portfolio. - Spreading Market Exposure
High-quality bonds have historically performed well when other asset classes struggle. A low correlation to stocks generally makes bond owners less vulnerable to shocks in the equities markets. For instance, in the late 1990s, with the Internet and telecommunications bubbles at their peak, some investors questioned the need to invest in anything outside of equities. But when those bubbles burst shortly thereafter, fixed income securities held up much better than equities.