There are many reasons for why one should have low risk asset classes in ones portfolio. Maybe the main reason is for hedging. Hedging makes sure that risk is spread, making the portfolio a safer place to put ones money into. When using low risk asset classes such as bonds, or interest, it compensates for the use of high risk asset classes such as currency or stocks.

To provide a clarifying example of this, if the risk in a portfolio can be between 0-100, and risky assets is above 30, and low risk assets are below 30, then the more low risk assets there are in a portfolio, the lower the overall risk will be.

Example:

• Stock A: 10 (low risk)
• Stock B: 40 (high risk)
• Stock C: 25 (low risk)
• Stock D: 60 (high risk)

Overall risk: 33.57 ((10+40+25+60)/4)

• Stock A: 10 (low risk)
• Stock B: 20 (low risk)
• Stock C: 10 (low risk)
• Stock D: 60 (high risk)

Overall risk: 25 ((10+20+10+60)/4)

Another reason for why one should use low risk asset classes is because these tend to yield higher in times of uncertainty. When there is confidence in the market and it is expanding, asset classes such as stocks become popular. More people turn to stocks for the high yield when there is confidence in the market. This lead stocks to get more expensive. People are also selling bonds and other less risky assets when there is confidence in the market to free up money for other assets. This often leads the price of bonds to drop, since the demand for bonds go down during expansion. However, as soon as the market becomes a little more uncertain, people start selling stocks and seek a safer place to put their money. This is the time that bond yields and interest rates go up, since the demand for these goes up.

Certain times: Stocks up; bonds down.

Uncertain times: Stocks down; bonds up.