5 lower-risk bonds that can help diversify a portfolio

Investing insights

Traditional investing strategies say to allocate part of your portfolio to fixed-income instruments — like bonds — to balance higher-risk investments, like equities.

"When growth assets don't do well, bonds can kick in and act as a smoothing mechanism over time," says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management.

Before making any decisions on asset allocation, review your portfolio strategy with a financial professional. Consider timelines, financial goals and desired level of risk – and remember that goals don't change just because the market is in flux. In lieu of total bond divestment, Haworth suggests simply reconsidering the types of bonds in your portfolio.

5 types of lower-risk bonds

When looking for bonds to add diversification with a lower risk profile, Haworth suggests choosing from the following options:

  • Government bonds. These are issued by stable governments with strong militaries and powers of taxation, including the U.S., Germany, Japan and Canada.
  • Highly rated high-quality corporate bonds. Global companies with diversified product offerings and a long track record of stability and success.
  • High-quality mortgage-backed security bonds. Bonds for both commercial and residential property mortgages can be good choices for diversification.
  • Bonds issued by government-sponsored enterprises. Organizations such as Fannie Mae and Freddie Mac provide credit and other financial services to the public and function as quasi-government entities.
  • High-quality municipal bonds. These bonds are backed by taxes and revenues from state and local jurisdictions. Focus on general obligations backed by well-funded jurisdictions or bonds from essential services such as water and sewer revenues.

While it may be tempting to invest in assets that hold the promise of a higher return, migrating away from bonds could increase the volatility of your portfolio.

“Some investors think that if they load up on high-yield bonds, they are diversified, but that’s not the case," Haworth says. While these types of bonds can add value to a portfolio, often they are as volatile as stocks and won't provide the same type of balance investors are seeking to achieve with lower-risk-rated bonds.

As always, these decisions ultimately boil down to risk management. If you’re looking to maintain the stability of your portfolio for unforeseen events, different types of lower-risk bonds may help you achieve that goal.

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