Bonds play an important role in asset allocation because they can provide a level of stability to an investor’s portfolio. No wealthy person has become rich, and stayed rich, without some type of bond in his or her portfolio. Bonds, cash investments, and real estate are the cement in a portfolio. They weather the down markets, when all your equity investments are giving you heartache, all the while generating interest income for you, which you can either reinvest, or use currently. For people who are naturally timid about investing, holding REITs, bonds, and cash is essential. However, remember that the price of the bonds and REITs will vary, as do equity investments. The cash positions held by investors will continue to increase, albeit at a slower pace due to the low nature of interest rates for cash securities. Although they tend to look bad when the market is booming and your equity investments keep rising, bonds and REITs provide current income that you may need if you have a large tax bill due to the capital gains and dividends provided by your equity investments. Plus, tax-exempt bonds give you tax-free income now.

One major advantage to REITs is that they offer some protection from inflation. Inflation has a negative effect on equities. As inflation increases, the buying power of our dollar decreases; thus, the buying power of the value of our equity accounts is also less. However, as prices rise, real estate prices also tend to rise. This inflation effect provides a benefit to the REIT investor because it is reflected in the REIT price, and possibly, the corresponding dividends. Bonds, cash, and REITs may not be as exciting or glamorous as stocks or mutual funds, but they play an essential part in a smart investor’s portfolio. Without them, your portfolio may not be adequately diversified.