by Marc Bastow | February 22, 2013 10:25 am
Investment planning is a continuous labor of love and attention … and right now, that attention should be in the direction of bonds.
Bonds — be they government or corporate — are an integral part of a long-term portfolio, acting both as an income stream and a counterweight to stocks. While its a little too simplistic to say bonds flourish when stocks flounder, many investors view bonds as the safer alternative and will subsequently flock to their safety when markets wobble.
Which brings us to today.
Interest rates have been on the decline over the last 30 years, with 10-year Treasury yields sliding all the way down to a 1.4% yield in July 2012. However, a quick look at the Treasury yield curve today shows that a different picture has been developing in the past few months.
As bond yields creep up, bond prices, which are inversely related, start to slide down — bad news for anyone with a large bond portfolio.
So, are we in a “risk-on” bond market? Well, not exactly, but perhaps its time to think about and maybe move on some new thinking.
Here are three ideas on how to act:
Cull the Winners: Just like you would with stocks — take my recent mistake with Apple (NASDAQ:AAPL), for instance — consider locking in any gains you might have made via bond funds. For instance, exchange-traded funds like the iShares Barclays 7-10 Year Treasury ETF (NYSE:IEF), iShares Barclays 10-20-Year Treasury ETF (NYSE:TLH) and the iShares Barclays 20+ Year Treasury Bond ETF (NYSE:TLT) have pounded out gains between 20% to 30% in the past few years, but have started to bleed a bit. If you’ve ridden ’em high, consider locking in some profits.
Refocus Maturities: In bonds, the longer the maturity, the better the yield, sure. The downside, however, is that funds leveraging longer maturities also are more susceptible to volatility — regardless of whether it’s a corporate, municipal or government instrument — thanks to the looming risk of inflation and changing rates. (For instance, TLT has a beta of roughly 4.5 vs. 2.2 for IEF.) If you are heavily weighted toward the far end of the maturity spectrum — say, in the 15-to-25-year range — rethink your allocations. Shorten up and live with a little bit less yield in exchange for a little bit less volatility.
Credit Quality Still Matters: Don’t just think government, however. See about getting exposure on the corporate side of the ledger. Bonds from AAA-rated companies like Microsoft (NASDAQ:MSFT) are still as good as gold, and you can count on those ExxonMobil (NYSE:XOM) and Johnson & Johnson (NYSE:JNJ) payments just as much as their dividends. Of course, the easiest way to get broad exposure to numerous corporate issues is via mutual funds like the Vanguard High-Yield Corporate Fund (MUTF:VWEHX) or ETFs.
Otherwise, if you’re at all invested in bonds, remember to make sure to keep your eye on the yield curve — which is pretty easy to do considering the info is readily available via a number of print and web sources.
Lastly, while it might be time to consider shuffling up your strategy a bit, it’s certainly not time to panic. While lower rates might be somewhat artificial due to Fed policy, the economy still is moving along slowly, and there’s nothing on the horizon (in my opinion) that will suddenly push things into another gear and flip the inflation switch.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long AAPL, MSFT, JNJ and XOM.
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