How to Diversify a Bond Portfolio
A bond is an IOU made to you by the government (federal, state or local) and corporations. In return for your money, they pay you a fixed interest rate over a period of time. Many financial advisors suggest that you maintain a bond portfolio with about 25 percent of your capital. Here are some tips on how to diversify your bond portfolio.
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Instructions
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Define your investing goals and time-line. Someone who is closer to retirement should be more heavily invested in bonds than someone who is young. This is because bonds are "safer" bets. They are subject to less fluctuation than the stock market and your payment is fixed. The only way you don't make a return is if the company folds.
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Make sure that you invest in quality. The whole point of your bond portfolio is to aid your stock portfolio by providing returns that will help counter losses. If you want to speculate, do it in the stock market where the returns will be greater. The highest level of bonds are U.S. Treasury's and the lowest level are called junk bonds. The higher the quality, the lower the yield, and inversely the higher the yield, the greater chance the company will go bankrupt.
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Understand your time horizon. Bonds are sold in numbers of years. The longer you agree to lock your bonds up, the more money you get paid. Stagger your bond portfolio so that you have some bonds maturing every few years. This will allow you to take advantage of better bonds that come along and move money into real estate or the stock market if you so desire.
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Watch for the expenses if you purchase a bond fund. They work just like a mutual fund. If your money is making 4 percent for 7 years, but the fund charges 1 percent, you will be better off simply putting your money in a CD. Understand the expenses so you can maximize the returns of your bond portfolio.
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Do your homework on your portfolio. The biggest thing that can hurt bonds are rising interest rates which eat at the principal of the bond. The most conservative portfolio consists of bonds that are short term with a high quality grade. Stay on top of market conditions and be ready to move your portfolio accordingly for your personal risk versus reward ratio.
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