The Term Risk Factor


Fixed income is also an important component to an investment portfolio. Since stocks and bonds frequently move in opposite directions, holding low-volatility bonds provides good diversification and will therefore level out a portfolio's performance by dampening stock volatility and providing short-term liquidity.

The "term (maturity) risk factor" refers to the difference in returns between long-term government bonds and short-term treasury bills. Longer-term bonds are riskier than shorter-term instruments and have yielded higher returns over the 86 years ending in 2013. Figure 8-10 shows six different fixed income allocations and their differences in risk and return.

Figure 8-10

Step 8Term FactorFixed IncomeBondsTreasury Bills