A Good Time to Check Your Bond Portfolio 5.00 / 5 (100.00%) 1 vote

Decades ago, the bonds market was one of the most popular investment options for investors who were looking for fixed income assets. However, that is no longer the case as bond funds are now becoming unattractive to investors for a number of reasons. Successful investors are often concerned with two things when managing their portfolio; beating the benchmark rate of return, and allocating their assets in the best possible way. Fixed income assets can be advantageous, but now is a good time to check your bond portfolio.

Why Bonds are Becoming Unattractive

Historically Low Yields: After adjusting for inflation and deducting taxes, the returns that U.S. government bonds yield are extremely low. The poor yields can be attributed to the low nominal growth in the developed world. What is unfortunate is that rates are expected to remain low in the future. Low yields are a result of the low inflation currently being experienced. The Fed is expected to adjust the base interest rate to control inflation for the good of the economy.

Tight Spreads: Low yields are forcing fixed income investors to invest in risky assets such as emerging market debt. Unfortunately, even these high risk funds offer lower yields than they used to a couple of years ago.

The Appeal of Short Term Bonds: Rates are expected to increase within the next one year in both the US and UK. This change will only have an impact on short-term bonds. In fact, the effects are already being felt as investors speculate on the impending increase.

What this Means

Investors need to reconsider their fixed income investments, particularly bonds. Investing in an asset that offers low returns does not make sense. While having a portion of your portfolio in bonds is not such a bad idea, the portion should be reduced and the difference allocated to other high-yield investments. This will provide both stability in your portfolio and decent returns. It is important to note that there are bonds from different sectors of the economy that still offer decent yields. If reducing your bond portfolio is not an option, you may want to consider moving some of your holdings to these high-yielding sectors.

The markets have changed significantly over the last two or three decades, which has made investing a little bit trickier. To get high returns without putting your portfolio at risk, investors need to consider investing in a wide range of markets and asset classes. Unconstrained investing will spread your risk across different industries, markets and assets.

Many people invest to preserve and grow their wealth. Unfortunately, investors who invest in long term fixed income investments can get negative returns if they are not careful. This is because taxes and inflation may eat up all their earnings and principal, leaving them with less money than they invested. For this reason, now is a good time to check your bond portfolio.