Whether you are saving for your first home or about to retire, bonds are likely to be an essential part of your investment portfolio. That is because bonds offer investors a number of potential benefits, including income, diversification, price appreciation and steadier returns when compared to stocks.
What are bonds?
Bonds are issued by governments and companies to raise capital. A bond is like an IOU. When you buy a bond, you are lending money to the issuer, who agrees to pay it back at a specific time, and in most cases, to make regular interest payments along the way. Many people associate bonds with U.S. Treasuries, however, they represent only about 13% of the worldwide total. Today’s global bond market is huge and is valued at more than $90 trillion.
The potential benefits of bonds
Whether or not you should invest in bonds will depend on your individual investment goals. Some of the main reasons to invest in bonds include:
- Income: Many bonds make regular interest payments, and investors can reinvest that money to help grow their principal or receive it as income.
- Price appreciation: Bonds have the potential to help your investment grow through price appreciation. Of course, as with any investment, there is also the chance that prices will fall.
- Steadier returns: Historically, bonds have offered steadier returns than stocks. This can help reduce big swings in your portfolio and preserve your assets.
- Diversification: Because stock and bond prices often move in different directions, bonds may help diversify your portfolio, thereby reducing overall risk. Diversification does not ensure against loss.
THE RELATIVE STABILITY OF BONDS
Bonds tend to be much less volatile than stocks – a key reason to invest in them.
Worst calendar year returns for the 1989–2014 time period. Stocks and bonds represented by the S&P 500 Index and Barclays U.S. Aggregate Index, respectively.