How to Mix Stocks and Bonds to Tide Away Recession?

Are you worried to see your mutual fund quarterly statements with most performing stocks in red and your invested funds heading south? This is all but natural with the current market scenario. So, if you have some money, think wisely before investing. Make the right mix of financial instruments and asset allocation to tide over current market crisis. It’s an age old practice that says the right blend of stocks and bonds can provide with right return in the investment portfolio. Does it work in recession as well?

What are stocks and bonds?

Stocks are basically shares of company that is held privately or traded publicly. It’s a small percentage of ownership that you as an individual hold in the company of which you are a shareholder. Stock investor will always expect a high rate of return always. Whereas in simple language bonds are lending money to the government or company with the promise that once the debt is paid back it will be paid with higher return. Bonds are issued with a specified time period. Stocks and Bonds are basically termed as financial securities.

Stocks and Bonds

The right mixture of stocks and bonds in your investment portfolio will depend upon several factors such as age, expected return, and most importantly risk taking capability of an individual, besides the time horizon of your investment. To determine one’s investment pattern, impact of prevailing interest rates also need to be taken into account. A typical situation is that with lowering of interest rate, the stock market and bond market moves up. Second, with longer time horizon, stock prices tend to appreciate if we consider that the market is growing in long run and stock prices does not plummet with growth of companies.

Importance of bonds in individual’s financial portfolio is heightened with the volatility and roller-coaster ride in the stock market. In this time of recession, bonds should form a part of your financial portfolio so the risk of stocks is spread over and will help to cushion market volatility and is key factor to gain long-term financial return. Diversification reduces risk and that’s why the right mix of allocation is important.

To make returns recession proof, a cautious mix of investment into corporate bond funds would be just cool as they can pay off great return. Corporate bond fund decreases the risk volatility to large extent. A possible allocation however will depend on age factor to a large extent.