The investment markets seem to always be on the move. One day stocks are up and another day they’re down. When the stock market is down, you’re at risk of your stock investments losing value. Including bond investments in your portfolio can help you diversify* your plan investments since bonds tend not to be as volatile as stocks. Here is some basic information about bond investments to consider before investing.
Stocks and Bonds Are Different
A stock represents an ownership interest in a company. Stocks have the potential to produce higher long-term returns than bonds, but they also have a greater risk of loss. In contrast, a bond is essentially an IOU from a borrower, such as a corporation or government entity. The issuer of the bond agrees to pay a specific amount of interest over a certain period of time and return the bond’s face value at maturity.
Managing Bond Risks
Bonds are sensitive to increases in interest rates. When interest rates rise, the prices of existing bonds with lower interest rates typically fall. If bonds are sold before maturity during a period of rising rates, investors could lose money. Generally, long-term bonds are more sensitive to interest rate risk and tend to be more risky than short-term bonds.
Benefits of Both
Stocks and bonds often have different reactions to economic conditions, so investing in both types of investments (asset classes) can potentially help you manage your portfolio’s risk exposure. If you put all of your plan account in just one asset class and that asset class declines, you could see a significant drop in the value of your account. When you invest in both, losses in one asset class may be partially offset by gains in the other. Keep in mind, however, that both the stock and bond markets could be up or down at the same time.
Make sure you consider the risks and potential returns of your investment choices when selecting investments for your plan account. You should be comfortable with your risk exposure and your account’s long-term growth potential.
* Diversification does not ensure a profit or protect against loss in a declining market.
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This publication is designed to provide useful information about retirement plans and investing your plan account savings. While the information contained herein was obtained from reliable sources, it cannot be guaranteed as to completeness or accuracy. Before acting on any of the information provided, consult your professional advisor.
FR2017-0404-0119/E ©2017 by DST