Gauging Your Personal Allocation To Bonds

allocation to bondsIncome investing strategy continues to pose unprecedented challenges in a world of ZIRP (zero interest rate policy). Though the Fed has finally given us reason to believe that its bond buying binge will come to an end, we still have little visibility as to when, or even if, it will be able to tighten near-term rates. Long-rates have been jostled around as investors hypothesize the future direction of the economy, reacting to each and every word from fiscal policymakers. While the recent perk-up of yields may be a positive development for bond investors looking for extra income, it could represent an equally concerning situation for those sitting on long duration individual bonds or bond funds.

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Meanwhile, as the domestic stock market trends higher and yields go lower, equity-income investors face a decidedly different set of challenges. For the diversified investor looking to own a balanced portfolio of stocks, bonds, and other income producing securities in today’s market, asset allocation decisions have never been so difficult.

To succeed in this formidable period, each income investment should be made after careful, judicious consideration of all available options, and optimally, analysis of the macroeconomic climate. Since every individual’s situation is different, one must come up with a template of allocation that meshes risk tolerance, stage of life, capital preservation desire, as well as income, and income growth needs.

Some investors may find a tremendous or exclusive need for bonds, while others may find little use for bonds, especially if tremendous growth of capital is desired.

Asset allocations, in my opinion, should not be a static or stringent portfolio parameter. While I would similarly discourage reactive portfolio churning, I see a slowly shifting portfolio, with waxing and waning allocations to various types of securities as market conditions dictate, as a prudent strategy. If one slowly migrates in and out of securities and sectors as opposed to rapidly making calculated bets, timing risk is kept to a minimum.

Back To The Future

Over a decade ago as the technology and Internet bubble rapidly inflated during the mid- to late-90s, I became very wary of the valuations of most growth oriented equity securities. At the time, my allocation to bonds was fairly minimal. However, as certain stocks continued to rise, seemingly on a daily basis, I slowly started to migrate my portfolio from those stocks into bonds and cash. I started doing this well before the Spring 2000 meltdown, thus I missed a lot of the upside of some of the stocks I held.

As growth stocks rapidly sold off, I got caught in the downdraft, but took solace in the fact that I had reallocated, to some extent, to the safer waters of bonds and cash. While I suppose I should have moved most everything to bonds, the point is that foresight is never 20/20 and I did at the time what seemed appropriate for my portfolio given what I knew and thought might happen.

As the “lost decade” drug on, my stock/bond allocation remained fairly static, shifting maybe a touch more towards bonds. However, over the past several years, in the fallout of financial crisis, my bond allocation migrated moderately back towards equities, as I perceived better total return value. Today, I’ll admit that I’m not exactly sure what direction the portfolio may take next. A recent move has been to add to my position in REITs (real estate investment trusts), given some of the income/total return value I see there.

So over the past several years, my exposure to fixed-income has gone down, yet I still own and have still been buying bonds of various sorts, wherever I am able to find and perceive portfolio and intrinsic security value. But with the recent spikes in both equity valuation and bond yields, I’m finding myself somewhat at a crossroads as to where market value exists. Thus, my cash position has risen a touch, despite the obviously very neutral and non-profitable nature of that asset.

Develop Your Own Bond Gauge

Investment analysis and allocation skills take time to develop and hone. While bonds continue to offer portfolio value in various regards, one should nonetheless be considerate of the risks and be thoughtful of the allocation one maintains at any point in time. As one invests and transitions through various life phases and market cycles, bond allocations should adjust along with other asset groups to preserve capital, maximize income, achieve optimum risk-adjusted returns, or manage other paramount portfolio goals.

About the author:

aloisiAdam Aloisi has over two decades of experience investing in equities, bonds, and real estate. He has worked as an analyst/journalist with SageOnline Inc.,, and Reuters and has been a contributor to SeekingAlpha for better than two years. He resides in Pennsylvania with his wife and two children. In his free time you may find him discussing politics, playing golf, browsing antique shops, or traveling.



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