Bonds Help Diversify Portfolios

Even as interest rates move off their lows and begin to hurt fixed-income assets, investors should not forget that bonds and related exchange traded funds still help diversify an investment portfolio and diminish overall volatility.

“For the folks who are really trying to find noncorrelated and less volatile investments, bonds fit that profile, and people own bonds because there is some kind of financial plan, whether it is stated or not,” J. Brent Burns, president of Asset Dedication LLC., said in an InvestmentNews article.

As interest rates begin to climb off their record lows and bond prices declined – yields and bond prices have an inverse relationship, investors should not become too trigger happy for alternatives to bonds.

“The question I always ask is, if not bonds, then what?” Chris Philips, a senior analyst in the investment strategy group at The Vanguard Group Inc., said in the article.

For instance, dividend-paying stocks have become a popular income generating alternative, along with emerging market debt, commodities, real estate investment trusts and high-yield bonds.

“If you are moving out of bonds into something else, all of those other strategies come with different and potentially greater risk than the bonds you are leaving,” Philips said. “The minute you try to replace fixed income with stocks, they will start performing like stocks because stocks never are and never will be bonds.”

While there is nothing wrong with squeezing out a little more return through alternative assets, analysts and advisors are concerned that investors are taking on greater risk.

“We’ve seen over the past couple of years a lot of investors moving out of traditional fixed income and into things that have increased duration exposure and interest rate exposure,” Philips added. “If you’re making that move out of bonds and into stocks, you better expect tremendous volatility.”

Source:  Tom Lydon and Tom Chen, ETF Trends

D2 Capital Management uses a variety of bond mutual funds and bond managers to maximize diversification in our client accounts.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.