Bond investing means owning debt from an organization, whether a company or government. Generally, bonds carry less risk than stocks because they carry a promise of return to face value, there’s a set interest rate backed by a company promise and debt is collateralized by company assets that debt holders can claim in the case of default. These factors contribute to price stability and a relative decrease in volatility compared to stocks. It also lowers the potential growth an investor can see from bonds.

As with other securities, the best bond investment strategy depends on your goals and appetite for risk. Consider your investing timeline, portfolio diversification and account structure when developing a bond investment strategy. Because bonds rely on continued organization solvency, longer-term bonds command high interest rates (to offset the risk of bankruptcy). As such, investors with a long horizon should look for longer-term bonds that offer those higher rates. Investors who will soon need money, though, should opt for shorter-term bonds to decrease risk and also return the principal sooner.

In a broad sense, AAII suggests that aggressive investors could hold 10% of their portfolios in intermediate-term bonds, while moderate investors could hold 30% of their portfolios in intermediate bonds and conservative investors could invest 40% in intermediate bonds and 10% in short-term bonds. The portfolio’s balance should be invested in a diverse mix of stocks (click here for more details on asset allocation).

Despite bonds’ general security, investors can lose with bonds. Decreasing interest rates lower the price of a bond and can cause funds to mark down bond values, or investors to sell bonds at a discount if they need to free up capital. Conversely, when bond prices rise with favorable interest rate changes, investors can profit. Bond prices go up when interest rates fall. Holding a bond to expiration negates these concerns but can keep capital tied up for as long as 30 years.

Why, then, buy bonds when interest rates are low, thereby offering limited returns and the potential for price decreases? Regardless of interest rates, investors need proper asset allocation for diversification and to generate consistent income—for example, during retirement. Properly structured bond ladders—which might include state-issued bonds, munis and other debt rated at least AA by Moody’s or S&P—can reduce interest rate risk and actually give investors upside regardless of directional movement.

Overall, bond investing provides portfolio diversification and a predictable return on capital. This page contains AAII’s most recent research and analysis on bond investing. You’ll find more tools and tips on how to craft the optimal portfolio and what risks to consider. For full access to these tools and countless others—including the monthly AAII Journal, our market-beating Model Shadow Stock Portfolio and weekly webinars—join AAII today for just $1!