Why bonds matter in this market

Yes, yields are low, but here’s how a lack of diversification could hurt investors.

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The threat that bond investments could lose value if interest rates rise doesn’t make the case for owning an all-stock portfolio—even in today’s market, according to Fidelity’s Jeff Moore, who thinks it’s a mistake to overlook the traditional role bonds serve in diminishing equity volatility and diversifying stock risk.

”I believe it is always important to think about diversifying and finding some balance,” notes Moore, portfolio co-manager of Fidelity® Investment Grade Bond Fund (FBNDX).

Consider a $100 portfolio: If you invest only in stocks with typical market volatility of about 20% a year, Moore says you should expect a two-thirds probability of finishing the year with $80 to $120.

Now, picture investing that same $100 in the investment-grade bond market. With average historical volatility around 3%, you’d have a two-thirds chance of ending the year with between $97 and $103 in principal, according to Moore. Then, add back 2% in interest earned, and you can expect to finish with anywhere from $99 to $105, he says.

Therefore, in most scenarios, he says bonds have tended to offer a degree of protection against portfolio drawdowns compared with owning just stocks, with the potential of more-predictable income generation.

Moore adds that he attempts to beat the return of the overall bond market by finding the best relative values for the fund, including corporate bonds, securities with higher-than-average coupons (stated interest rates), and select BB-rated debt.

He and fellow manager Michael Plage try to capture only a little outperformance when market conditions are relatively stable, then take on more risk when they see lots of value.

It’s rare for bonds to lose value, Moore adds. Looking back over time, the investment-grade bond market, as measured by the Bloomberg U.S. Aggregate Bond Index, declined in just three of the past 45 calendar years since 1976—compared with 10 years of negative performance for the U.S. equity bellwether S&P 500® over the same span.

“I like the resilience, lower volatility, and income-generating potential that investment-grade bonds can provide, and believe, when held in prudent proportions, they can offer increased safety and peace of mind, especially compared with just owning stocks,” he says.

For specific fund information, including full holdings, please click on the fund trading symbol above.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
Investing involves risk, including risk of loss.
Diversification does not ensure a profit or guarantee against loss.
Sector funds can be more volatile because of their narrow concentration in a specific industry. Growth stocks can perform differently from other types of stocks and the market as a whole and can be more volatile than other types of stocks. Value stocks can perform differently than other types of stocks and can continue to be undervalued by the market for long periods of time. • Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. • Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. • In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation, credit, and default risks for both issuers and counterparties. • Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. • The municipal market is volatile and can be significantly affected by adverse tax, legislative, or political changes, and the financial condition of the issuers of municipal securities. • The securities of smaller, less well-known companies can be more volatile than those of larger companies. • The funds can invest in securities that may have a leveraging effect (such as derivatives and forward-settling securities) that may increase market exposure, magnify investment risks, and cause losses to be realized more quickly. • Leverage can magnify the impact of adverse issuer, political, regulatory, market, or economic developments on a company. In the event of bankruptcy, a company’s creditors take precedence over the company’s stockholders. Although the companies that the fund invests in may be highly leveraged, the fund itself does not use leverage as an investment strategy. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry. In the event of bankruptcy, a company’s creditors take precedence over the company’s stockholders. Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC.

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