How To Get Great Performance Out of Bond Funds
Three years ago, the US credit system experienced something of a collapse, sending global markets into a whirlwind (a downward whirlwind it should be added). With that, a lot of investors were reminded of the importance of a proper asset allocation model, forcing them to re-examine their risk tolerance levels.
Ever since those bleak days in 2007, 2008, and again in March 2009, the concept of risk tolerance has taken on a brand-new meaning for aggressive and conservative investors alike. For the conservative investors, it meant that maintaining growth could no longer be found in bank-issued term deposits or government issued treasuries.
The aggressive investor, however, also has had to revisit asset allocation with added emphasis on the income class, which aggressive investors have traditionally shunned from their portfolios in favor of more aggressive equity class investments.
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.
When you really get to know these high yield investments, it becomes clear that they not only provide greater volatility than some equity funds, they pay greater income and offer just as much growth potential. Meanwhile, they achieve these benefits while taking on much less risk.
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. - 23221
Ever since those bleak days in 2007, 2008, and again in March 2009, the concept of risk tolerance has taken on a brand-new meaning for aggressive and conservative investors alike. For the conservative investors, it meant that maintaining growth could no longer be found in bank-issued term deposits or government issued treasuries.
The aggressive investor, however, also has had to revisit asset allocation with added emphasis on the income class, which aggressive investors have traditionally shunned from their portfolios in favor of more aggressive equity class investments.
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.
When you really get to know these high yield investments, it becomes clear that they not only provide greater volatility than some equity funds, they pay greater income and offer just as much growth potential. Meanwhile, they achieve these benefits while taking on much less risk.
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. - 23221
About the Author:
Find out more about Bond Funds as well as Investment Strategy at the MutualFundSite.org.
posted by X - Men @ 5:46 AM
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