Nearly all investors realize the importance of diversification to the investment process. Many may not be as familiar with the importance of asset allocation—dividing your portfolio into the appropriate mix of stocks, bonds, and cash.

Although assets can also include real estate (homes, vacation homes, and rental properties) or business ownership, the most widely held asset classes are stock, bonds, and cash.

In a strong economic climate, the potential for gain when stocks perform well opens up.

Typically, most people who invest in the stock market also see value in having a liquid cash reserve set aside for emergencies and larger expenditures.

But, what about bonds? Are they affected by economic swings and what are the risks involved?