Bonds in a Portfolio
Including an allocation to fixed-income investments can diversify a portfolio to help manage the overall volatility of returns.
Fixed income can help smooth returns
Along with the other major asset classes, bonds are a vital building block for many portfolios. As a result, it’s important to understand what they are, how they work, and why investors purchase them.
- Bonds can offer investors both income and tax advantages.
- Fixed-income holdings can help smooth portfolio returns over the long term.
- Although fixed income can play a vital role in many portfolios, it is important to avoid overexposure to this, or any other, asset class.
- To help balance risk and return, it is helpful to diversify fixed-income holdings broadly—spreading exposure across sectors and global issuers.
Investments in fixed-income securities are subject to interest rate and credit risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. 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.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors, and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
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