Key Takeaways
- Many people assume bonds only stabilize the volatility of stocks. But bonds can also help with income generation, inflation-risk management, diversification, or tax considerations.
- When interest rates rise, bond prices generally fall. Some investors hedge against this “interest rate risk” by building a bond ladder, where you hold a succession of bonds until they mature. So, if rates rise, the bonds that are maturing can be reinvested at higher yields.
- The amount of bonds you hold depends on your goals, time frame, and comfort with risk. Investors with shorter time horizons may prioritize stability differently than those with longer time frames, who may have greater capacity to withstand market fluctuations.