Bonds, bonds and more bonds. Have you been asking yourself, “Why have I been hearing so much about bonds lately?” or wondering if all the talk means you should make changes to your investments? The Mutual Fund Show ® tackled this subject just last month, but since we continue to receive questions on this, let’s take another quick look at the role bonds play in investing and whether they should still be part of your overall retirement strategy.

Bonds are often used by investors to help diversify a portfolio and reduce its volatility and risk. They also tend to provide higher income than a money market or savings account. However, keep in mind that bonds aren’t risk-free. Here are three factors you need to consider when evaluating bond funds:

• Interest rate risk. When interest rates rise, a bond’s value typically decreases.
• Duration, or measure of how likely it is to react to changes in interest rates. The lower the duration, the less effect interest rate changes are expected to have on the bond’s value.
• Credit risk, or reflection of a bond issuer’s ability to pay its debts. For example, U.S. Treasury bonds are considered to have little to no credit risk. Most corporate bonds are evaluated for credit quality by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. Bonds rated BBB or higher by Standard & Poor’s and Fitch, and Baa or higher by Moody’s, are generally considered “investment grade” – or of high enough quality for a prudent investor to purchase them.

Evaluating bond funds for your investment strategy can be complex, especially in light of the amount of recent chatter on the subject. How much you should be invested in bonds depends on your risk profile. For example, a more conservative investor would likely be more heavily invested in bonds than a more aggressive investor who is comfortable with risk.

Here’s what we’re doing to tackle bonds in the current investing environment:

• Though The Research Center doesn’t expect the Federal Reserve (Fed) to increase the Fed funds rate in the near term, we recognize that market rates may rise before then. In preparation for a rising interest-rate environment, we’ve been shifting our exposure to credit risk from interest-rate risk by sticking with high-yield or floating-rate funds. Funds we are using in our portfolios are BlackRock High Yield Portfolio (BHYSX) and Oppenheimer Senior Floating Rate Fund (OOSAX).

If you need help determining how much you should be invested in bonds, try an online asset allocation calculator or contact one of our investment advisors.

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