The stock market is volatile. If you put all your retirement plan assets into stock investments and the stock market declines, you may see a significant decline in the value of your plan account. Adding bonds to your portfolio can help you diversify* your investments. Having a well-diversified portfolio that includes both stock and bond investments may help you stay on track to meet your retirement savings goal.
How They Differ
Stocks and bonds tend to respond differently to changes in economic conditions and other events, so investing in both asset types can potentially help reduce overall portfolio risk. Bonds tend to be less volatile than stocks. Stocks typically produce higher long-term returns but have greater risk of loss than bonds. Bonds may perform well when stocks decline and vice versa. When you include both stock and bond investments in your portfolio, gains in one asset class may at least partially offset losses in the other asset class.
However, bonds are not risk free. For example, bonds are vulnerable to interest-rate risk. When interest rates rise, the prices of existing bonds with lower interest rates tend to fall. (Conversely, when interest rates go down, the prices of existing bonds paying interest at higher rates typically rise.) Since they are more sensitive to interest-rate changes, long-term bonds tend to be a riskier investment than short-term bonds.
Some bonds also have the risk that the bond’s issuer won’t be able to pay interest or repay the investor when the bond matures. This is known as default risk. Corporate bonds are more vulnerable to default risk than U.S. Treasury bonds, which are backed by the full faith and credit of the federal government. Choosing bonds that have high ratings from the major bond rating services can reduce default risk.
Make sure you consider the risks and potential returns of your retirement plan’s investment options when choosing investments for your plan portfolio.
Questions about your portfolio? Contact one of our wealth management team members today.
* Diversification does not ensure a profit or protect against loss in a declining market.Back to Articles