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.
“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.