What role do bonds play in a diversified investment portfolio?

Bonds play a crucial role in a diversified investment portfolio primarily because they provide fixed income and help to reduce overall volatility. Including bonds in a portfolio allows investors to receive regular interest payments, which can be an important source of income, particularly for those who are retired or seeking stability.

Additionally, bonds tend to have a lower correlation with stocks, which means that when stock prices are volatile or declining, bond prices may remain stable or even increase. This characteristic helps to cushion the overall portfolio during market downturns, effectively balancing risk and providing a more stable return on investment.

The nature of bonds as fixed-income securities also contributes to capital preservation, allowing investors to maintain their principal investment while still earning returns through interest payments. This stability is essential in achieving long-term financial goals without excessive risk exposure, making bonds a fundamental component of strategic asset allocation in a diversified portfolio.