Overview: For many investors, fixed income (or bonds) is an important part of their investing equation. However, many investors misunderstand the roles that fixed income play in portfolios. The following discusses the proper use of fixed income.

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One of the most basic distinctions in investing is between equity and fixed income. While many investors know the difference between the two, it’s important to note the differing roles they play:

This is a simple, yet important distinction that ends up defining the purchases investors make with respect to each asset class.

 

Historically, equity has had higher returns than bonds, but has also been associated with much higher risk. Thus, those seeking capital appreciation (or higher returns) tilt their portfolios more heavily toward stocks, as they have higher expected returns. However, a portfolio consisting entirely of stocks may not be appropriate for some investors for many reasons:

This is where fixed income has a role. There are three main uses for fixed income: