Fixed Income investments are a very prominent investment tool, which contributes to sustaining a diversified portfolio. Fixed income securities such as bonds, offer a regular income and stability of principal to investors. However, there are many investors today, which do not understand the full benefits to investing in fixed income securities.

The general characteristics that are used to describe a bond include, steady returns from income, moderate price risk, capital gains that can offset equity losses, and higher reinvestment opportunities in down markets. Therefore, bonds are used by many professionals in the financial services industry to gain an advantage, improving the risk/return characteristics of a client’s portfolio. Bonds alleviate some of the risk associated with other portfolio asset classes because they respond to market forces in a different manner.

In comparison to equities, bonds show a much narrower range of returns in their best and worst years. Unfortunately, over the course of history bonds show less upside then that of stocks, in terms of potential gains. Although, at the same time there is much less of a down side to a bond then there is associated with a stock. So, depending on the type of bond, there can be less risk associated with the investment, but less opportunity overall for significant returns on investment. For this reason, it is clearly evident how an allocated portion of bonds can be beneficial in hedging ones portfolio against market risk in equities.

The analogy I like to use is that bonds are like your airbag in your car. If the car crashes your airbags could save your life. Similarly, if the stock market crashes bonds could save your portfolio.

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