Bonds:Fundamental Investment Strategies
As you build your investment portfolio of fixed-income securities, there are various techniques you and your investment advisor can use to help you match your investment goals with your risk tolerance.
Diversification:
Diversification can provide some protection for your portfolio, so if one sector or asset class is in the midst of a downturn, the rising value of another class of assets may help offset the negative impact.
For example, suppose your portfolio held a variety of high-yield and investment-grade bonds.
You chose the high-yield securities for their greater returns. The investment-grade bonds probably generate somewhat lower yields, but their ability to weather economic downturns should offset potential credit-quality concerns which could affect the high-yield securities in the portfolio.
Similarly, you might want to balance corporate issues with Treasury, municipal or mortgage-backed issues offered by government-sponsored agencies.
Laddering:
Another diversification strategy is to purchase securities of various maturities.
When you buy bonds with a range of maturities, a technique called laddering, you are reducing your portfolio's sensitivity to interest rate risk.
If, for example, you invested only in short-term securities, the kind least sensitive to changing interest rate risk, you would have a high degree of stability, but you might be giving up yield.
Conversely, investing only in long-term securities may result in greater returns, but their prices will be more volatile, exposing you to losses should you have to sell before maturity.
Building a laddered portfolio involves buying an assortment of bonds with maturities distributed over time. For example, you might invest equal amounts in securities maturing in two, four, six, eight and 10 years.
In two years, when the first bonds mature, you would reinvest the money in a 10-year maturity, maintaining the ladder.
Your return would be higher than if you bought only short-term issues. Your risk would be less than if you bought only long-term issues.
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