Why
Diversification is Important
Different Risk Profile
Bonds typically have a lower risk compared to stocks. While stocks can experience high volatility, bonds generally offer more stability and predictability, providing a counterbalance to the higher-risk assets in a portfolio.
Income Generation
Bonds provide regular interest payments, known as coupon payments. This steady income stream can help balance the more variable returns from equities and other growth-oriented investments.
Lower Correlation with Equities:
Bonds often have a lower correlation with stocks. This means that when stock prices fall, bonds might not be affected in the same way, helping to reduce the overall volatility of the portfolio.
Capital Preservation
Bonds, especially government or high-quality corporate bonds, are generally considered safer investments. They help preserve capital while providing fixed returns, which can be crucial during economic downturns.
Diversification Within Fixed Income
The bond market is diverse, with various types of bonds (government, municipal, corporate) and different credit qualities. This diversity within bonds allows for further risk reduction and opportunity for returns.
Mitigation of Market Fluctuations
Bonds can act as a buffer during periods of stock market turbulence. Their stable returns can help offset losses from other more volatile investments.