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Market Decode: How Bonds Work—and What They Can Do for You

Watch this video to get the basics on this key ingredient in a well-diversified portfolio


GENERALLY CONSIDERED THE MORE BORING, conservative part of an investor’s portfolio, bonds typically don’t get as much press as stocks do. And because they function differently from stocks and come in so many different flavors—Treasuries, municipals, corporate, high yield, etc.—they can be confusing. In the video above, Matthew Diczok, fixed income strategist for Merrill Lynch Wealth Management and Bank of America Private Bank, offers a clear, simple explanation of how bonds work and why they should be considered an important part of an investor’s strategy.

A well-diversified portfolio should include a mix of stocks, bonds and cash (the three major asset classes). How much of each you hold depends on your financial goals, risk tolerance, time horizon and liquidity, or cash, needs. When it comes to bonds (also referred to as fixed income), there’s a general rule of thumb: The more conservative you are as an investor, the more bonds you may want to own, relative to stocks (also known as equities). If you’re willing to accept a greater amount of risk—and have a longer time horizon to reach your investment goals—you may be more comfortable leaning more heavily into stocks than toward bonds.

Watch our video and then check out our slideshow below to find a recommended asset allocation based on the type of investor you are. Our easy-to-use questionnaire, Identifying Your Allocation Profile, can help you determine your investor type. And be sure to speak with your financial advisor about any adjustments you might want to make to your long-term financial strategy.

Graphic showing a bar chart with a sample asset allocation. The text reads: What kind of investor are you? Conservative — 28% cash, 20% stocks and 52% bonds. The source for the sample allocation is the Chief Investment Office, based on data from 2019. Disclaimer: The strategic allocations shown here are designed as guidelines for a 20-30 year investment horizon for investors with the highest level of liquidity needs.
Graphic showing a bar chart with a sample asset allocation. The text reads: What kind of investor are you? Moderately conservative — 2% cash, 37% stocks and 61% bonds. The source for the sample allocation is the Chief Investment Office, based on data from 2019. Disclaimer: The strategic allocations shown here are designed as guidelines for a 20-30 year investment horizon for investors with the highest level of liquidity needs.
Graphic showing a bar chart with a sample asset allocation. The text reads: What kind of investor are you? Moderate — 2% cash, 55% stocks and 43% bonds. The source for the sample allocation is the Chief Investment Office, based on data from 2019. Disclaimer: The strategic allocations shown here are designed as guidelines for a 20-30 year investment horizon for investors with the highest level of liquidity needs.
Graphic showing a bar chart with a sample asset allocation. The text reads: What kind of investor are you? Moderately aggressive — 2% cash, 72% stocks and 26% bonds. The source for the sample allocation is the Chief Investment Office, based on data from 2019. Disclaimer: The strategic allocations shown here are designed as guidelines for a 20-30 year investment horizon for investors with the highest level of liquidity needs.
Graphic showing a bar chart with a sample asset allocation. The text reads: What kind of investor are you? Aggressive — 2% cash, 87% stocks and 11% bonds. The source for the sample allocation is the Chief Investment Office, based on data from 2019. Disclaimer: The strategic allocations shown here are designed as guidelines for a 20-30 year investment horizon for investors with the highest level of liquidity needs.

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