Tags: Clements | bonds | safe | portfolio

WSJ's Clements: Be Careful Which Bonds You Choose for Safety

By    |   Monday, 08 December 2014 02:36 PM

The bond portion of your portfolio is traditionally designed to balance the risk of equities with the safety of fixed-income.

But beware, not all bonds provide that safety, writes Wall Street Journal columnist Jonathan Clements. For example, high-yield bonds trade more like stocks than bonds, he notes. And junk bonds are inherently risky to boot, as they're typically issued by companies with financial woes.

If safety is what you want, "when picking bond funds, avoid even the slightest whiff of credit risk — the chance that a company or government might not meet its financial obligations," Clements says.

Investment adviser and author William Bernstein tells him that in a bear market, "you need all the psychological crutches you can get. When you see assets that you think are safe take a hit like that, the ground shakes."

When choosing a bond fund Clements suggests looking at how the fund performed in 2008, when stocks tanked, and in 2013, when bonds tanked. Then decide if you're comfortable with that kind of performance.

"Make sure the safe portion [of your portfolio] is supersafe by focusing on investments with government backing. That might mean buying short- or intermediate-term government bonds, certificates of deposit, and high-quality short-term municipal bonds," Clements writes.

Meanwhile, the fact that the Federal Reserve might raise interest rates next year doesn't mean you have to dump all your bond holdings, says Johnathan Burton, assistant commentary editor for MarketWatch.

"But you should watch both the bond market and the Fed closely and be selective about where you put your money," he notes.

"Parts of the bond market can actually do quite well in this world," Mark Kiesel, chief investment officer of global credit at Pimco, tells Burton. The Fed is expected to raise rates only slowly, and aging investors gravitate to fixed-income assets.

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The bond portion of your portfolio is traditionally designed to balance the risk of equities with the safety of fixed-income.
Clements, bonds, safe, portfolio
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2014-36-08
Monday, 08 December 2014 02:36 PM
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