A Social Security system involving personal investment accounts that limited permissible investments to equities alone would run counter to the interests of plan participants. It is true that over long periods of time, diversified portfolios of stocks have generally outperformed diversified portfolios of bonds and other fixed-income investments. Although portfolio managers disagree on the appropriate mix of stock and bonds, there is widespread agreement that in almost all cases, long-term investors should have a portion of their portfolios in bonds as well as stocks. This becomes even more true when a retirement investor begins to approach the time when he or she will sell assets to finance current spending. Bonds are important for a number of reasons.
Bonds are less volatile than stocks, i.e., they offer more consistent rates of return.
Bonds are also important because they generate income. Although some stocks pay dividends, the dividend yield on stocks overall is significantly lower than the income yield on bonds. Income is especially important to investors like retirees who spend, rather than reinvest, a significant portion of their returns. Finally, bonds are safer than stocks. They are the best way to ensure a full return of principal.