Please read important information at the end of this program. Recorded on 02/14/2024.
[Matthew Diczok speaking throughout]
Stocks and bonds: they're two words that are often paired together, but they're very different. Stocks are in the news pretty much daily, especially when markets are volatile.
[ON-SCREEN TEXT]
Matthew Diczok
Fixed Income Strategist, Chief Investment Office
Merrill and Bank of America Private Bank
Bonds, on the other hand, are talked about less and may seem a little more complicated.
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Bonds are talked about less than stocks
but have an important role to play.
But they play a really important role for investors, especially when markets are unsettled.
[Bond icon appears on right-hand side of screen]
To compare the two, if owning a stock is like owning a piece of a company, owning a bond is like owning a piece of a loan to a company.
Many types of borrowers - companies, governments, government agencies — issue bonds to fund a wide range of activities, everything from building roads and bridges, to investing in new plants and equipment, to buying other companies.
[Video of different type of buildings.]
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Companies; Governments; Government agencies
[A man wearing safety gear looks up at the scaffolding.]
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Roads & bridges
[Moving robotic arm.]
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Plants & equipment
[The hands of two people having a meeting together.]
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Buying companies
And the investors, called bondholders, get regular interest payments in the form of coupons in return for lending money to these borrowers.
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Bondholder, $$$, Borrower
[Dollar signs move from Bondholder to Borrower.]
That's the primary benefit of bonds:
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Bondholder %%%, Coupon rate; $$$ Borrower
[The percentage signs move from Borrower to Bondholder.]
They pay you a set interest rate, also known as the "coupon rate," at regular intervals until the end of a bond's term, or its "maturity date."
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Bondholder %%%%%%, Maturity date; $$$ Borrower
[The word default appears above the dollar signs, the dollar signs turn red.]
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Bondholder %%%%%; Default $$$ Borrower
As long as the bond issuer doesn't default, you'll receive your investment, the "principal" amount, at that maturity date.
[The word Default disappears, the dollar signs move next to the word Bondholder, with Principal written underneath.]
[$1,000 icon and bond icon appear on screen]
So let's say you buy a 10-year, $1,000 dollar bond paying five percent interest: You'll receive fifty dollars every year for 10 years, and when the bond matures, you'll get that $1000 back.
[$50 notes fall from the bond icon, which then turns into a $1,000 note.]
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Bond; $1,000
There are many different kinds of bonds issued, and which types you choose for your portfolio will depend on your goals, your time horizon and how much risk you're comfortable with.
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- Goals
- Time horizon
- Comfort with risk
[A scale appears that shows 'more and less risk' on the left and 'lower and higher return' on the right. The scale for U.S. Treasury Bonds points to 'Less risk' and 'Lower return'.]
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Types of Bonds; U.S. Treasury Bonds; More risk Lower return; Less risk Higher return
On-screen disclosure:
For illustrative purposes only
For example, U.S. Treasury bonds are backed by "the full faith and credit of the U.S. government," and therefore are considered the safest type of bonds, with no credit risk. For that reason, though, the interest rate they pay is relatively low.
[The heading changes to 'Municipals & investment grade corporate bonds', and the scale balances out so it sits in the middle of all options.]
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Types of Bonds; Municipals & investment grade corporate bonds; More risk Lower return; Less risk Higher return
On-screen disclosure:
For illustrative purposes only
State and local governments also issue bonds, known as Municipals, as do investment grade companies, who issue corporate bonds. Both types of issuers generally have strong credit ratings and offer slightly higher yields than Treasurys for slightly higher credit risk.
[The heading changes to 'High yield corporate & international bonds', and the scales tips to 'More risk' and 'Higher return'.]
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Types of Bonds; High-yield corporate & international bonds; More risk Lower return; Less risk Higher return
On-screen disclosure:
For illustrative purposes only
High-yield corporate bonds and some international bonds, on the other hand, carry higher coupon rates but come with significantly more risk. So, there's always a trade-off between the coupon a bond pays and the amount of credit risk it presents to its bondholders.
Another important factor: In general, the longer the time until a bond matures, the higher coupon rate you'll receive.
[A vertical scale appears from 2 to 30 years. The percentage payout is in a bubble that slides up and down the scale. As the bubble moves up the scale, the percentage fluctuates between 2.5% to 5%. The higher up the scale, the larger the percentage.]
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30 year; 20 year; 10 year; 5 year; 2 year
So, a 30-year Treasury bond will generally pay a higher rate of interest than one with a maturity of 5 or 10 years for example.
When it comes to your investments, Bonds matter for several reasons.
First, they can provide you with a relatively predictable income stream.
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1) Predictable income stream
Second, bond prices don't vary as much as stock prices do. So, bonds can potentially provide a source of stability in a portfolio.
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2) Potential source of stability
Finally, bond prices may move differently than stock prices – rising in price as stock prices fall.
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3) Bond prices may move differently than stocks
That means they're an essential part of a well-diversified portfolio.
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Well diversified portfolio
Whatever approach you take, knowing your tolerance for risk, your financial goals, and your timeframe for meeting those goals are essential in assessing how many and what type of bonds are best for you.
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Know your:
- risk tolerance
- financial goals
- timeframe
On-screen disclosures:
IMPORTANT INFORMATION
The opinions expressed are as of 2/14/2024 and are subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
Bank of America, Merrill, their affiliates, and advisors do not provide legal, tax, or accounting advice. Clients should consult their legal and/or tax advisors before making any financial decisions.
All recommendations must be considered in the context of an individual investor's goals, time horizon, liquidity needs and risk tolerance. Not all recommendations will be in the best interest of all investors.
Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa. Bonds are subject to interest rate, inflation and credit risks. Municipal securities can be significantly affected by political changes as well as uncertainties in the municipal market related to taxation, legislative changes, or the rights of municipal security holders. Income from investing in municipal bonds is generally exempt from federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government. Investments in high-yield bonds (sometimes referred to as "junk bonds") offer the potential for high current income and attractive total return but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a junk bonds issuer's ability to make principal and interest payments. Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments.
This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
Merrill makes available certain investment products sponsored, managed, distributed or provided by companies that are affiliates of BofA Corp. MLPF&S is a registered broker‐dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp.
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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 pursue your investment goals — you may be more comfortable with stocks than with 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.
Note: These allocations may be subject to change based on periodic review and are for illustrative purposes only. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.