A primary reason investors own bonds is because their values have historically remained relatively stable over time. In other words, they’ve been less risky than stocks. (Of course, their returns have been lower as well.) So, you might want to have bonds in your portfolio in case the stock market takes a hit. If that happens, the bonds could stabilize your portfolio’s overall value. And that may help you avoid making emotional (and sometimes costly) heat-of-the-moment choices.
Lower risk doesn’t mean no risk
Bonds are considered less risky than stocks, but they’re certainly not risk-free (no investment is). Although some investors may believe bonds are as safe as cash, that’s not the case. In fact, bond investors face a number of risks, including:
Interest rate risk. The chance of a change in a bond’s price in response to movements in interest rates. It’s important to understand this risk in a low-interest-rate environment because bond market prices and interest rates are negatively correlated. In other words, if interest rates increase, existing bond prices are likely to decrease. Conversely, when rates are higher and begin to decrease, bond prices will tend to increase.
Credit risk. The prospect that an issuer may suffer a relative decline in credit quality or outright default. The lower the credit risk, the fewer credit-related price fluctuations there should be.
Default risk. When you purchase a bond, you face the risk that the issuer may be unable to pay the interest or par value when it’s due.
Opportunity risk. The possibility of missing out on potentially better returns you may be able to get from other investments, like stocks.
Consider your big picture
Whether you’re talking about bonds or stocks or any other investment, it’s important to remember that the amount you own should be determined based on a strategic asset allocation — how your portfolio is divvied up between different investment types — based on your:
If you already invest in bonds or are wondering whether you should, you need to understand their risks and the important role they can play in your overall investment strategy. For help with that, you may want to work with a professional financial adviser.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can cause a bond’s price to fall. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower rated bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
This article was written by/for Wells Fargo Advisors and provided courtesy of Ponte Vedra Wealth Management Group in Ponte Vedra Beach at 904-273-7918.
Investment and Insurance Products are:
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company. PM-06272025-6182753.1.1
©2024 Wells Fargo Clearing Services, LLC.
