Despite the recent stock market rally, the financial crisis is expected to create a broad, long-term shift toward a lesser role for stocks and a bigger role for bonds, cash and other investments in portfolios. After all, bonds are designed to add stability and income to a portfolio.
But the fixed-income asset class is a group of diverse sectors that often move independently from one another. It is extremely difficult to predict which category of bonds will be the best or worst performer in any given year. The performance of any fixed-income investment can have drastic periodic changes. Investors could potentially diminish their returns by attempting to follow last year’s winner.
Therefore, diversifying within the fixed-income asset class may further lessen overall portfolio risk.
Click on the image below to view an enlarged fixed-income asset class performance chart.
Past performance is no guarantee of future results. Diversification does not eliminate the risk of experiencing investment losses.
Bond Risk: Bond funds will tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price, especially for longer-term issues and in environments of rising interest rates.