Diversifying investment risk with bonds

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The key to successful investing is to minimize that risk while maintaining an attractive return on the investments. One of the most effective ways to minimize the risk is to diversify. By diversifying the investments among stocks, bonds and money market securities, can lower the overall investment risk. Diversification can help even out price swings during the normal ups and downs of the stock market.

Many investors, understandably concerned about the future of the equity markets, are looking at alternative investment vehicles. For those who desire to increase the diversification in their portfolio in the hope of reducing their risk, fixed-income securities may be the answer mentions the article. All securities behave differently from one another, going up and down in separate cycles and to varying degrees. An individual stock is affected by a combination of different elements, including the overall stock market, health of the industry the company does business in, and the companys own performance. Though stocks generally vary more than fixed-income investments, fixed-income prices can be affected by changes in interest rates and the overall fixed-income market.

The author beliefs that equity markets, where stock prices are determined by factors such as anticipated earnings, market share, and expectations of future profitability that drive price, bond pricing is affected primarily by the current interest-rate environment. The author identify that the problem with adding bonds to a portfolio to reduce overall inherent risk is the possibility that the investor may lose principal within the bond portfolio if interest rates increase, thus defeating the objective of risk reduction. The recommendation of the author in relation to interest rate is that investors need to consider how to achieve an acceptable rate of return by investing in fixed-income securities without experiencing the higher risk associated with interest-rate fluctuation. They should determine what is the adequate offset of higher risk for higher return before they invest. Also the author adds, to minimize the impact of interest-rate changes, investors may wish to diversify their bond portfolios based on varying maturities.

The article mentions bond mutual funds as an alternative if current income is not an objective. Bond mutual funds offer the advantage of income reinvestment, allowing the investor to purchase additional bonds at current price levels. Funds vary greatly in their objectives and performance, which is no more guaranteed than investing in individual securities. Investing in a mutual fund eliminates one part of investment planning, selecting and buying individual securities that have the potential to meet goals. Also, mutual funds are highly diversified mentions the author. Each mutual fund share typically represents an interest in a mix of many different securities.

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The practice of laddering a bond portfolio also provides a very attractive method of diversification cited the article. Laddering can be accomplished by purchasing individual bonds or bond mutual funds. Laddering involves building a portfolio of bonds with staggered maturities so that a portion of the portfolio will mature each year, or some other specified time period. The author's recommendation regarding this method is that investors requiring current income should ensure that the different levels of income afforded by laddering are adequate to meet their current income needs.

My recommendation is to meet with a registered investment professional to take a fresh look at the current asset allocation plan or check which alternative is adequate to meet the current income needs. Also, it is important to regularly monitor the investments to make sure that the original allocation has not shifted.

In summary diversification spreading the money among many different investments takes a middle road through the highs and lows of market performance, allowing money the opportunity to grow regularly with fewer fluctuations along the way. Also, the main reason for diversification is simple. By including a variety of investments in the portfolio, the risk is less than put all money in one type of investment.

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