3 Tips on how NOT to mismanage your Bond Portfolio

The sure sign of the fact that you’re dealing with an insane person (or got off your own rocker for that matter) is repetition of the same old thing that never worked, hoping that this time it will all be different.

The examples in history, sociology, politics, economics etc. are plenty, there is no sense in leafing through them once again here (it’s been done many times by the much more academically inclined peeps than this humble pen pusher). However, since we are learning to invest properly, to review once again mistakes people make mismanaging their investment portfolios would be in order.

In fact, let’s make it nice and punchy: reviewing one’s mistakes over and over again - good. Making those same mistakes over and over again after carefully considering all possible implications of one’s actions - bad.

Yet, I see it all the time in conversations “around water coolers”. Granted, the topic of diversifying one’s portfolio by buying into bond funds seldom comes up, but when it does, virtually every one of my interlocutors veers off course and…


...forgets the general purpose of the fixed income investment.


So, I have to remind them that if buying bonds is their game, they’d gotten into it mostly to generate regular and hopefully bullet-proof income while knowing that principal is safe and secure somewhere. Alleviating equity risk is no small matter here either, so the big talk shouldn’t be about buying yachts and planes and things, but, rather, one’s risk tolerance and income goals, age, health, job security, retirement plans, you know, things that are not in general considered sexy. What is sexy, however, is your will power and ability to stay the initial course so that those who depend on your perseverance and due diligence won’t regret it.

Again, there’s a flipside to this coin. Always a flipside! Bonds today are not what they were ten years ago, when the return you could justifiably hope for was in the lower 5% range (the 5.25% three-month Treasury bills were legendary back then).Today a ten-year note would yield a lower 2%. Let’s face it, however safe, not much of an investment. So, the temptation to sacrifice equity in favour of more promising investment opportunities, be that at the cost of higher volatility, is omnipresent in the world of moneyplay. So, beware and…


...remember that investing is an instrument of a future well being, not an immediate source of income.


It happens all the time and it amazes me, frankly, how soon after starting towards their nest egg people forget that a major (if not the only) goal of a well diversified retirement (let’s take retirement as an example) portfolio is not so much to earn living but to protect principal. It’s nice to be able to take a few bucks out every so often but when you buy bonds, most of all you don’t want them to lose value. And if that’s your goal, why on earth would you want to jump into something as volatile as, say, the Emerging Markets?
So, once you’ve built your portfolio and are happy with the way your investments fit and work together, just stop, concentrate on something else for a while and…


...try not to dump your bonds when interest rates rise.


Again, a popular affliction, especially with the ETF bonds because you can watch the Exchange Trade Funds prices throughout the day, just like you do stocks, and get scared ten times even before lunch. Well, don’t. Turns out, fluxing rates are nothing to be scared of when you hold bonds long term. Even if your fund sheds a bit of value in the beginning when interest rates go up, reinvesting later at those high rates yields higher income. Usually for an intermediate fund the cycle is five years or so, take it easy.

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