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More In Bonds Headlines. Market Insider. There's an inverse relationship between the two. So as yields decline, bond prices will increase, and vice versa, as yields increase, bond prices will fall. Liz Tammaro: Okay and so actually while we are talking about some of the basics here we're going to go to a second question, which is, since bond prices decrease as rates rise, which we've established, why would anyone be buying bonds in the anticipation of a Fed rate increase?
Chuck, you're a financial advisor, what do you think about that question? Investing you're supposed to be making money, why would I be investing in something that seems like it's poised to go down in value.
And what I've been reminding investors a lot about is the fact that the reason that you hold bonds in a portfolio, and really the whole reason, primary reason for holding bonds in your portfolio is that they provide the protection in your portfolio from the volatility of stocks.
And if you look at the two there's no comparison in terms of the volatility, even in anticipation that rates are going to rise and bond values are going to fall.
They're nothing like stocks. There's a chart that we have that I use with clients called a bear market chart that compares the bear markets of the bond market versus the stocks. And you can see, if you look at just the difference on that chart on the left how much deeper, how much further stock prices fall relative to bonds. And that stocks have a much more greater potential of decline. And so even though bonds are going to potentially go down in value over the next couple of years, the share prices are—the amount that they go down is just so much less.
And so having that protection in the portfolio is key. You are getting some interest income to help out with the portfolio overall return, that's really the primary purpose, that income is just to help out with return.
Because what's the only other option to provide stability in the portfolio is cash and we all know what cash has been paying, it's literally almost nothing these days. So that's why you hold bonds in a portfolio. If your portfolio's a little light on bonds, if your allocation's a little light, you should be buying bonds. Sounds strange but that's really a very good way to maintain your portfolio and to invest sensibly. Liz Tammaro: Yes, so what I'm hearing you say is that bonds actually serve a balance to stocks in a portfolio in terms of risk and volatility.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk. For more information about Vanguard funds, visit vanguard. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation. Advisory services are provided by Vanguard Advisers Inc. VAI , a registered investment advisor. Advice services are provided by Vanguard Advisers, Inc. Bonds and bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
Skip to main content. Managing your portfolio Financial markets. Bond markets Bond markets tend not to see big swings in value like stock markets do. As interest rates change, the values of bonds will fluctuate.
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