Take Safety In Bonds

Here's how diversifying your portfolio with fixed-income investments can cushion the effects of market volatility

the past five years without having to touch her principal. “Her portfolio is structured to provide income that she can live on,” says Landers, revealing that Cochrane bought her house two years ago using her returns. “[She] started her bond portfolio in 1996, and she’s gotten a 17.86% return since inception.”

Cochrane’s main fund, The Delaware Corporate Bond Fund, concentrates at least 65% of its assets in high-quality securities rated BBB or above by Standard & Poor’s. The fund returned 11.3% for 2001, outperforming its category by 4%, according to Morningstar. The fund managers may also mix in some high-yield bonds, which are restricted to below 20% of the fund’s total assets. The remainder is invested into common and preferred stock, and cash and convertible bonds, which can be transformed into equity at an investor’s discretion.

Once an investor decides to purchase individual bonds, there are a number of things to consider. “I would like for people to have a sprinkle of each type of bond,” says Bryant. “My feeling is that the best values are in intermediate bonds, at least in the Treasury market.”

After treasuries, Bryant and Landers advise investors to cast a wide net when augmenting bonds in, or adding bonds to, a portfolio. Just as you want to diversify your portfolio with stocks from a variety of sectors, Bryant says, “You want to hold a wide range of bonds in order to further minimize risk.” He suggests municipal bonds, issued by state and local governments, as the next safest purchase. Although they are relatively low-yielding securities, investors shouldn’t overlook their other benefits. “If you bought a five-year muni giving you a 3.02% yield, it would come out equivalent to a taxable five-year bond returning 4.37% if you’re in the 31% tax bracket.”

As for corporate bonds, Landers says that novice investors should approach with caution. A corporate’s fate is tied to the credit rating of its issuing corporation, which is risky in today’s economic environment when the recession and fears about deflation — a general decline in the price of goods and services — are keeping corporate earnings sluggish. “The higher the yield [on corporate bonds], the lower the quality,” he warns, pointing out that the assumption of excessive risk runs counter to the purpose of fixed-income investing. “Everybody should have some bonds as part of their overall portfolio, but unless you are fearless, you will always want to minimize the potential downfall.”

Remember, bonds are simply another investment vehicle that can produce returns. You can enjoy the safety they provide by purchasing bonds that lock-in a specific rate of return during down markets, or you can ride the strength of the market in good times. As Landers likes to say, “There’s a bond out there for everybody.”

BOND PORTFOLIOS FOR LIFE

Dale Bryant, portfolio manager at The Bryant Group in New York City, says people of all ages should incorporate bonds into their investment portfolio. He has fashioned three sample portfolios, taking the following factors into consideration.

In the current economic environment, Bryant says,

Pages: 1 2 3 4 5
ACROSS THE WEB