Change Your Bond Mix

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Change Your Bond Mix

When it comes to getting more aggressive with investing, in addition to altering your asset mix you can adjust specific asset groups, too.

Take bonds, for example. Short- and intermediate-term bonds and bond funds are commonplace in investment portfolios. To adjust your bond component, consider adding one or more of the following types of bonds/bond funds:

Long-term bonds

Because the maturity dates of long-term bonds are farther away than those of short- and intermediate-term bonds, long-term bonds tend to yield more. They also tend to gain more when interest rates fall and lose more when interest rates rise.

High-yield bonds

High-yield bonds are corporate bonds issued by lower-quality corporations. These bonds carry more credit risk—the risk that the issuer will default on the debt—than higher-quality bonds do. As a result, they generally yield more than the average high-quality bond.

The returns of high-yield bonds very often follow the returns of the stock market more than the returns of the bond market. Why? Because the performance of high-yield bonds is influenced by the growth and earnings of the company that issued the bond, just as the performance of a stock is influenced by the growth and earnings of the company that issued the stock. Rising or falling interest rates have little bearing on the performance of high-yield bonds.

Convertible bonds

Convertible bonds are stock surrogates even more than high-yield bonds are. That’s because convertible bonds can be, as their name suggests, converted into stocks.

We’re not going to get into the details of that here. But because of this conversion feature, convertibles behave very much like stocks. They are generally less volatile, though, because they pay a fixed coupon (or yield). They are bonds, after all.

Where to find more information

You can find ideas for these investments by using online screening tools such as those offered by Morningstar. Analyst recommendations are also a good source.