Reducing Risk with Bonds and Cash Equivalents
Investment managers try to balance risk and return in a portfolio. Both historical data and portfolio theory confirm that the expected returns on stock investments are greater than the expected returns on bonds and cash equivalents. As a result, portfolio managers make stock investments to pursue higher returns and use diversification in the portfolio to help reduce risk.
Even a broadly diversified stock portfolio, however, may still have more volatility than is desired. To reduce risk, less volatile asset classes can be included in the portfolio – bonds and cash equivalents. These asset classes have traditionally been considered to be primarily income producing. Academic research, however, has shown that the primary reason for their inclusion should be to reduce volatility. FMS utilizes a variety of bond and cash investment strategies to design portfolios with lower risk to help meet a client’s investment needs and risk tolerance.