Bonds Still Vital to Portfolio

Meanwhile, a much more conservative fund aimed at retirees had 80% in bonds and cash and 20% in stocks; it fell 5.29%.

If your portfolio is properly diversified, keep up the good work. If you are like many investors, however, and are chasing higher yielding bonds or staying away from fixed income altogether, consider the following advice:

Decide How Much You Want in Bonds

What percentage of your portfolio you allocate to bonds should be a function of the amount of risk you can tolerate.

While stocks offer the potential for higher returns, they also carry greater risks. In the long term, however, the stock market tends to outperform bonds, so younger investors should have less of their portfolio in bonds (somewhere between 15% and 20%) to maximize the growth potential from stocks.

As you get closer to needing the money in your portfolio (say, for retirement or college tuition), the risk of losing too much in a market downturn becomes more significant.

Older investors should shift a bit more into bonds, without giving up the growth potential in stocks. Finding the right balance for you may require you to consult a qualified financial planner.

Diversify Your Bonds

Just because bonds are geared more toward stability than stocks doesn't mean you should ignore returns altogether. By keeping the bulk of your bond money in high-quality, intermediate-duration bonds you can satisfy the stability component of your portfolio. But by adding a dose of riskier high-yield bonds to your portfolio you can help improve your returns without exposing yourself to the potential for unacceptable losses.