Determining whether bonds belong in your portfolio is a process that takes a few steps.
First, you need to determine what percentage of your portfolio you want in stocks and what percentage you want in bonds. Historically, stocks have gained in periods of economic recovery and bonds have gained in periods of economic recession.
It is reminiscent of a fountain soda. You need just the right mixture of syrup and carbonation in order for a soda to taste great. There are different kinds of syrup and some people even like to mix multiple syrups to form their own flavor. Too much syrup makes it too sweet, and if there isn’t adequate carbonation, the drink will be flat.
Once you’ve found a good percentage mixture, then you can drill down into what types of stocks and bonds suit your particular investment goals. The idea here is that if one sector (technology, retail, energy, etc.) begins to falter, the impact is only a percentage of your nest egg and not the entirety of it. For a stark reminder of the diversification principle, please see anyone who has lost their life savings in one investment.
For example, and for illustrative purposes only, if you have decided to put $30k in bonds, you’d put $10k in Bond A in one industry, $10k in Bond B in a second industry and $10k in Bond C in yet another industry. You may even diversify further still and put $5k in two separate companies within each industry. You may diversify further yet and put varying amounts into separate asset classes within each industry.
Next ask yourself, if the company who issued the bond was to go bankrupt, would your entire portfolio be affected, or only a portion? And is that an outcome you are comfortable with? In the example above, if the company who issued Bond A was to default on their payments, leaving nothing for bondholders, the investor would still have $20k from the other two companies.
Finally, if you are considering purchasing a bond as a portion of your investment portfolio, be sure to seek out the advice of a professional investment advisor to determine if it is a suitable investment for your time horizon, risk tolerance and financial goals.
Investing involves risk including the potential loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
Kari Eso is a Financial Planner and Investment Advisor Representative for LPL Financial, 7600 Hwy 72 W, Suite 201, Madison, AL 35758. She can be reached at 256-325-3731. Securities offered through LPL Financial, member FINRA/SIPC.
