Debunking the Myth
Fixed income can play an important role in an investor’s portfolio. The level of exposure to fixed income in an investor’s portfolio will, of course, depend on a variety of factors specific to the investor, including his or her goals, time horizon, and risk tolerance.
Incorporating fixed income into a portfolio may benefit investors in three primary ways:
Smooth the overall volatility in the portfolio. Bond prices have historically low correlation to stocks. This low correlation makes fixed income an important component in meeting the fundamental strategy of a well-diversified portfolio. Reduced portfolio volatility helps better protect investors during down market years and can help them realize more consistent returns over time.
Enhance risk-adjusted returns. While stocks offer potential for greater long-term returns, they also come with a higher risk profile. The introduction of bonds to a portfolio can potentially produce a more favorable risk-reward trade-off for investors.
Provide ‘peace of mind’. In addition to the income bonds pay investors, their lower volatility compared with stocks can provide an emotional ballast1 that can help investors stay invested during down market cycles and allow them to sleep better at night.
Source: MorningstarDirect as of 9/30/2019. Ultra-Short Duration is the ICE BAML 1-3 Month US Treasury Index. US Core FI is the BbgBarc US Aggregate. US High Yield is the BbgBarc US High Yield 2% Issuer Cap Index. Bank Loans is the Credit Suisse Leveraged Loan Index. For illustrative purposes only. Investors cannot invest directly in an index. Past performance is no guarantee of future results.
1In shipping, ballast refers to the heavy material carried in order to provide stability and control. In investment terms, it is often used to describe fixed income’s potential ability to provide stability during times of equity market volatility.