Bond Inflation Risk

• Inflation can erode bond returns. For example, a return of nominal 4 percent in a given year is minus-1 percent in real dollars if inflation was 5 percent that year.
  
  

Stock Principal Loss Risk

• Stocks represent a claim of future profits instead of debt obligated to be paid back. With stocks, there is no legally binding promise of any profit to the stockholder.
  
  

Bond Yield

• Bond returns have less variability than stock returns. Most bonds do not suffer the magnitude of capital loss characteristic of stocks, but neither do they yield as much of a positive yield during good times.
  
  

Stock Capital Gain

• During good times, a diversified stock portfolio typically higher returns than bonds, beating inflation. However, a downswing can be severe. In the 2008-2009 recession, the Standard and Poor's 500 dropped 16.79 percent during October 2008 alone.
  
  

Correlation

• Positive correlation between securities indicates that when one rises, so does the other. Negative correlation means that when one security type rises, the other falls. Low or negative-correlated stock/bond combinations can give substantial long-term yield without excessive risk.