Understanding How Stocks and Bonds Work Together

Every financial adviser you will ever talk to and every investment article that addresses portfolio diversification will tell you to put some of your money into stocks and some of your money into bonds. But why?

The reason: stocks and bonds typically don’t move in the same direction—when stocks go up, bonds usually go down, and when stocks go down, bonds usually go up—and investing in both typically provides protection for your portfolio.

[VIDEO] Understanding How Stocks and Bonds Work Together

Why Stocks and Bonds Typically Move in Opposite Directions

Stocks and bonds typically move in opposite directions because they are fighting for the same money from investors.

When investors use their money to buy stocks, they have that much less with which to buy bonds. Conversely, when investors use their money to buy bonds, they have that much less with which to buy stocks.

Oftentimes, investors will also sell bonds to raise money to buy stocks or sell stocks to raise money to buy bonds. When this happens, the price of both asset classes are affected.

Here’s how it works:

– When investors buy stocks instead of bonds, stock prices go up and bond prices go down
– When investors buy bonds instead of stocks, bond prices go up and stock prices go down

Why Investing in Both Stocks and Bonds Provides Protection

Diversifying your account by investing in both stocks and bonds provides protection because you can offset some, or all, of your losses in one investment with the gains in the other investment.

If your stock holdings lose value because stock prices are going down, your bond holdings may offset those losses if bond prices are going up.

The opposite is also true, if your bond holdings lose value because bond prices are going down, your stock holdings may offset those losses if stock prices are going up.

Disclosures

This article is produced by Learning Markets, LLC. The materials presented are being provided to you for educational purposes only. The content was created and is being presented by employees or representatives of Learning Markets, LLC. The information presented or discussed is not a recommendation or an offer of, or solicitation of an offer by Learning Markets or its affiliates to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances and your investment objectives. Learning Markets and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

Any specific securities, or types of securities, used as examples are for demonstration purposes only. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security.

Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) carefully before investing. Leveraged and Inverse ETFs may not be suitable for all investors and may increase exposure to volatility through the use of leverage, short sales of securities, derivatives and other complex investment strategies. These funds’ performance will likely be significantly different than their benchmark over periods of more than one day, and their performance over time may in fact trend opposite of their benchmark. Investors should monitor these holdings, consistent with their strategies, as frequently as daily. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing.

Investors should consider the investment objectives, risks, charges, and expenses of mutual fund carefully before investing. Mutual funds are subject to market fluctuation including the potential for loss of principal. A prospectus contains this and other information about the fund and is available from the issuer. The prospectus should be read carefully before investing.

Options involve risk and are not suitable for all investors. Detailed information on the risks associated with options can be found by downloading the Characteristics and Risks of Standardized Options and Supplements (PDF) from The Options Clearing Corporation, or by calling the Options Clearing Corporation at 1-888-OPTIONS.

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