The Role of Fixed Income in a Diversified Portfolio
Bonds are not risk-free. Their role in an allocation depends on duration, credit, and the environment in which they are held.
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Fixed income is often characterized as the conservative component of a portfolio. That framing obscures two distinct risks: sensitivity to interest rates and exposure to credit.
Duration determines how much a bond's price moves when rates change. Credit quality determines the probability that contractual payments are made at all. A portfolio can be conservative on one dimension and aggressive on the other.
Fixed income may contribute income characteristics and behavior that differs from equities in certain environments — though correlations are not constant, and there have been periods in which both declined together.
The practical question is not whether to hold bonds, but which bonds, at what duration, at what credit quality, and for what purpose within the broader allocation.
This article is provided for educational and informational purposes only. It does not constitute investment, legal, or tax advice, a recommendation, an offer to sell, or a solicitation of an offer to buy any security. Investing involves risk, including the possible loss of principal, and past performance is not indicative of future results.