Bonds and similar risk-off assets are an important component of a well-diversified portfolio.
Your investment portfolio should be tailored to your long-term goals and appropriately match your individual risk tolerance. Investing in different market areas across multiple asset classes will limit your portfolio’s ups and downs, but it doesn’t always feel good.
You may feel like you’re losing when your diversified portfolio isn’t performing as well as the S&P 500 performed. However, over the long term, a diversified portfolio can help you capture a large portion of the upside of the market and a smaller portion of the downside.
Historically, equities outperform fixed-income securities, but looking at performance without taking into account risk reduction only tells part of the story. In addition to reducing the volatility of your portfolio, there is an income component from the interest paid to you for holding the bond. Both of these are very important as you are constructing a portfolio for your glide path to and in retirement.
As you get older, wealth preservation becomes a greater priority as opposed to growing your portfolio as quickly as possible. Allocating a larger portion of your portfolio to bonds as you get closer to your goals can help balance the risk of investing with the reward of your more beautiful tomorrow.
Check out the video below for more information on choosing an asset allocation that matches your goals!
