Yahoo Finance What Bonds Can Add to Your Portfolio
Good Reasons You May Want to Be in—and Stay in—Bonds
Top three reasons to retain bonds
3.Capital preservation.
Bonds – specifically core, high-quality, intermediate-term bonds – have been significantly less volatile than stocks, making them a good anchor for your portfolio. Diversifying across different types of bonds can further help manage risks such as inflation, rising rates and default implosions, which can hurt bond prices.
How do I get in?
Most investors should own some bonds, at least for diversification. And investors have a wide field to choose from, whether it’s through actively managed bond mutual funds or low-cost exchange-traded funds (or ETF), or a combination of both. There are even new “smart” strategies designed to help reduce specific risks.
How much, how many and what kind will depend on your own risk tolerance, financial circumstances, goals and so on. This is a great conversation to have with your advisor or someone else you trust.
Market Realist: What bonds can add to your portfolio
Bonds, especially Treasuries (TLT), provide a cushion to your portfolio during a risk-off scenario when equities get clobbered. As such, bonds increase the risk-adjusted returns of your portfolio. As we alluded to in the second part of this series, bonds and equities react differently to any particular scenario.
The graph above shows two efficient frontiers, each representing a range of hypothetical portfolios that can be created by combining different asset classes. The orange dots show possible portfolio combinations using a selection of classes within equities (IVV). The light blue dots show the portfolios that include both equity and bonds (AGG)(BND).
The graph shows the hypothetical return and risk each portfolio combination would have had over ten years. The equity-only portfolio has to take on much more risk to generate a return similar to that of the portfolios that include bonds.
While Treasuries (IEF) aren’t yielding much at the moment, they can still play a role in your portfolio. It’s not to add great returns but rather to help reduce risk, provide relative stability to your portfolio’s performance, and add steady income.
Meanwhile, Treasuries don’t perform particularly well in a rising interest rate scenario. Enter high yield bonds (HYG). High yield bonds usually do well when rates are rising.
Read A Rare Loss for Bonds: Must-Knows for a Changing Environment to learn what is leading to a convergence in the performances of stocks and bonds.
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