How To Get Great Performance Out of Bond Funds
Investment management has become an all-important component to investing, particularly after the past 3 years since the collapse of the US credit system. A lot of investors have taken a good, hard look at their asset allocation model and determined that their risk tolerance might be a lot lower than they might have originally believed.
Those dark market days that tested new lows and personal strength pushed the ideals of risk tolerance to the surface and made both conservative and aggressive investors alike realize that risk tolerance has to be paramount. For conservative investors, that has meant no longer being able to rely on term deposits and treasuries to contribute to the growth of an investment portfolio.
For the aggressive investor, the implications were probably more grave. It meant proper diversification needed to take center stage. That meant finding opportunities in the income class, a class that might have been ignore completely in the past.
Over the past decade or so, bond funds (which are part of the income class) have evolved tremendously. These funds now invest in high yield, below-investment grade investments that not only provide a greater income stream but can react with the same voracity as some equity class securities.
The reality is that these high yield investments can be more volatile and provide more income that some of the more conservative equity funds. And the most interesting (or important, depending on your position) is that these bond funds incorporate considerably less real risk than equity funds.
All things being equal, a bond fund will be much less risky than an equity fund. The problem that bond funds have faced is in their rating system, with Moody's and Standard and Poor's having come under fire after the credit crisis. Therefore, what was an investment grade and low-paying bond two years ago is now B-rated with higher rates as the spreads between government and corporate bonds widened. The result? The bond investor benefits.
These high yield bond funds will actually generate greater returns than conservative equity funds. And since bonds come with less research and trading costs, there are even more savings for the investor... all with one important benefit: less risk. - 23229
Those dark market days that tested new lows and personal strength pushed the ideals of risk tolerance to the surface and made both conservative and aggressive investors alike realize that risk tolerance has to be paramount. For conservative investors, that has meant no longer being able to rely on term deposits and treasuries to contribute to the growth of an investment portfolio.
For the aggressive investor, the implications were probably more grave. It meant proper diversification needed to take center stage. That meant finding opportunities in the income class, a class that might have been ignore completely in the past.
Over the past decade or so, bond funds (which are part of the income class) have evolved tremendously. These funds now invest in high yield, below-investment grade investments that not only provide a greater income stream but can react with the same voracity as some equity class securities.
The reality is that these high yield investments can be more volatile and provide more income that some of the more conservative equity funds. And the most interesting (or important, depending on your position) is that these bond funds incorporate considerably less real risk than equity funds.
All things being equal, a bond fund will be much less risky than an equity fund. The problem that bond funds have faced is in their rating system, with Moody's and Standard and Poor's having come under fire after the credit crisis. Therefore, what was an investment grade and low-paying bond two years ago is now B-rated with higher rates as the spreads between government and corporate bonds widened. The result? The bond investor benefits.
These high yield bond funds will actually generate greater returns than conservative equity funds. And since bonds come with less research and trading costs, there are even more savings for the investor... all with one important benefit: less risk. - 23229
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posted by X - Men @ 5:44 AM
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