Many investors have responded to record-low bond yields and a potential increase in interest rates by taking on more risk in their portfolios – or abandoning the space altogether. Rather than reacting to market conditions, we recommend investors be proactive and strive to maximize the benefits bonds have traditionally provided.
Bonds Can Play a Critical Role
Even in today’s low-yield environment, bonds can play a critical role in clients’ portfolios:
• Downside protection. A bond’s face value establishes a fixed value that doesn’t exist with stocks.
• Potential for diversification. Over the past 30 years, bonds have exhibited a low correlation with stocks, helping tamp down the effects of volatility.
• Income. Few income-producing investments can offer the same downside and diversification benefits. Constructing a Bond Portfolio for Today
Today’s bond investors should consider risk exposure as well as return potential, and those unwilling to accept higher risk need to lower their return expectations. Yet opportunities still exist for those willing to address their bond portfolio proactively.
Unlike stocks, in which major sectors tend to move up or down in tandem, bonds are more segmented, with each segment potentially responding differently to market factors. This leaves bond investors with more options to address possible market conditions:
• Yield Curve: Short-Term, Intermediate, Long-Term
• Sector Selection: Government, Corporate, Mortgage, Securitized, Municipal
• Credit Quality: High, Medium, Low
• Geographic: U.S., Developed Markets, Emerging Markets
• Bond Structure: Fixed Rate, Floating Rate, Inflation-Linked
• Hedging Strategies: Short Positions, Duration, Interest Rate, Currency
Given today’s low-yield environment, developing a long-term strategy for your bond allocation is crucial. Prudent bond investors may want to re-evaluate their expectations as well as their portfolios.
Article provided by Baird for The Gervais Group at the North Shore office of Robert W. Baird & Co., member SIPC. The Gervais Group has a combined 25 years of financial services industry experience, and can be reached at 262-240-3519 or email@example.com.
If you have questions or need more information, please contact your Financial Advisor.
Past performance is not a guarantee of future results and diversification does not ensure a profit or protect against loss. This is not a complete
analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change.
Fixed Income Risks
Market Risk: The risk that the bond market as a whole would decline, bringing the value of individual securities down with it regardless of their fundamental characteristics.
Costs and Fees: The risk that the costs and fees associated with an investment are excessive and detract too much from an investor’s return. Liquidity Risk: The risk that investors may have difficulty finding a buyer when they want to sell and may be forced to sell at a significant discount to market value.
Credit Risk: The risk that the borrower will be unable to make interest or principal payments when they are due and therefore default.