How to Use Fixed Income in a Balanced Portfolio
Investors will be familiar with stories of eye-catching gains in stocks, property, or even cryptocurrencies. These headlines can make it tempting to focus solely on high-return opportunities. Yet successful investing is not just about chasing the biggest gains but about building robust portfolios and managing risk.
Fixed income plays a vital role in this process. It offers stability, diversification and predictable income, helping investors create a portfolio that can weather different market conditions. Bonds can complement growth-oriented assets by reducing portfolio volatility and providing a steady income stream, which is especially valuable when markets grapple with uncertainty.
Several factors influence an investor’s decision to buy bonds:
1. A provider of portfolio stability
Bond returns are typically more predictable than those from stocks and other higher-risk assets that offer greater potential gains. Investors seeking greater security and less volatility in their portfolio – perhaps as they approach retirement or become more risk-averse – often increase their allocation to bonds help guard against unforeseen market events.
2. Regular income
Fixed income provides a stream of coupon payments on a set schedule – whether quarterly, biannually, or annually – that can be spent or re-invested. While many stocks also offer income through dividend payments, these can be lower than coupon payments and are never guaranteed. In tough times, companies will often reduce dividends. Bond coupons, however, are fixed and legally binding, making them a reliable source of income.
3. Capital preservation
Along with coupon payments, bond issuers have another key obligation: to repay the principal when the bond matures. While there is always some risk of default (the higher the yield, the greater the risk), investors in highly rated bonds (such as government bonds) can be confident of recovering their initial investment on a specified date. They also receive interest payments that may exceed bank deposit rates, making these bonds an attractive option for income-focused investors.
4. The benefits of diversification
Diversification is a cornerstone of sound investing. By spreading capital across multiple asset types (stocks, bonds, commodities, gold, real estate, alternatives), investors can reduce the risk of significant portfolio losses. It’s rare for every asset class to decline simultaneously. Typically, when some assets fall, others may rise. Bonds can offer diversification and help hedge portfolio risk because their returns often have low, or even negative, correlation with other asset classes, particularly in times of economic uncertainty or deflation.
The historical range of returns of different asset classes
Source: Bloomberg as of 31 December 2025.
U.S. equities are represented by the S&P 500 Index, global equities are represented by the MSCI EAFE Net Total Return Index, U.S. bonds are represented by the Bloomberg US Aggregate Bond Index, global bonds are represented by the Bloomberg Global-Aggregate Total Return Index and cash is represented by the FTSE three-month Treasury Bill Index. Past performance is not a guarantee of future results. Performance reflects unmanaged index returns and is not representative of past, or predictive of future performance of any PIMCO strategy or investment product. It is not possible to invest directly in an unmanaged index.
5. Potential for capital appreciation
Bonds are not static assets. Their prices fluctuate on the open market in response to changes in interest rates and shifts in the bond issuer's credit quality.
Investors who intend to hold a bond to maturity will be unaffected by any market changes. As long as the issuer does not default, they will still receive regular coupon payments and the principal back upon the bond's maturity. However, if interest rates fall and the bond's price rises, investors may choose to sell the bond before maturity and realise a capital gain, in addition to the income they’ve already received. The combination of income and capital appreciation is known as “total return”, a widely used framework for evaluating and managing bond investments.
6. A hedge against uncertainty
Bonds can play a valuable role in a long-term investment strategy by helping to hedge portfolios during periods of economic uncertainty or slowdown. A bond's price is tied to its income stream. In inflationary environments, that income is worth less in real terms, making the bond less attractive. When economies slow, inflation typically falls, increasing the real value of bond coupons and supporting bond prices. The fact that economic slowdowns are frequently accompanied by shrinking corporate profits and falling stock prices enhances the appeal of stable bond income.
If the slowdown develops into a recession – often accompanied by moderating inflation – bond income gains even more purchasing power. Rising demand for bonds typically pushes their prices higher, which can further boost returns for bondholders.
