How to Use Bonds to Balance Your Portfolio
Investors use bonds to balance out the riskier parts of their portfolios as they generally have steady, but unspectacular, returns. As the market inflated and returns ran wild, bonds got a rap as boring, dull investment vehicles. But in this environment, even with the stock market showing signs of a rebound, boring they are not.
The whole purpose of owning fixed income is to reduce the total risk of your overall portfolio; to dampen the volatility that comes part and parcel with stocks and other high-risk asset classes. Gregg Fisher, president of Gerstein Fisher and a CFP, suggests to his clients that they find low-cost bond funds as a way to hedge against risk. In picking a bond fund, make sure the bonds that make up the fund are short-term, high credit quality and extremely low cost. Of course, if you have the resources it can be better to just buy these types of bonds directly, he says. Always remember that bonds are not a net safe play, either. Sometimes they can actually be more volatile than equities.