LB Ratings – Bond Fund Categories and Allocation


 
 
Having the right category allocation is just as important as having a highly rated fund.  For this reason LB ratings will always have a category associated with them.
 
 
 
 
 
Sample  Asset Allocations
This is just a starting point which should be adjusted according to a number of factors including your need for income and risk tolerance. Full Explanations below the table.

You are in a High Tax Bracket
& Don’t Have A Market View
Medium Tax Bracket
& Don’t Have A Market View
High Tax Bracket & Have A Market View Medium Tax Bracket & Have A Market View
Stock Allocation 60% 60% 50% 50%
Core Bond Fund 20% 40% 10% 30%
Municipal Bond Fund 20% 0% 20% 0%
Low Duration Fund Varies Varies Varies Varies
High Credit Risk Fund 0% 0% 10% 10%
Short Or Long Duration Fund 0% 0% 10% 10%

We believe that most investors should own between 2 and 5 bond funds, each in a separate category. To help you narrow down the universe of bond funds to the fund or funds that are right for you, we have categorized all bond funds into 5 LB Ratings Categories:

 

Core Bond Fund Category

core bond fund should be composed of a diversified portfolio of  investment grade bonds and have an intermediate term duration.

Who are core bond funds right for?  Every investor should have at least a portion of their portfolio invested in a core bond fund.  For lower income investors without a market view, 100% of their bond fund allocation could be made to a core bond fund.  High net worth investors may only have a small portion of their funds invested in a core bond fund and opt for more tax efficient options like municipal bond funds instead.

 

Municipal Bond Fund Category

municipal bond fund should be composed of tax-exempt investment grade municipal bonds and have an intermediate term duration.

Who are municipal bond funds right for? A high net worth investor may consider putting the majority of their bond fund allocation into a municipal bond fund, for the tax benefits they offer.  A low income investor would likely allocate no money to municipal bond funds.

 

Short-Term Bond  / Low Duration Bond Funds

In most cases, we believe short-term “cash” should be kept in an FDIC insured bank account. However, there may be times when your cash exceeds the limits of FDIC insurance or is too much money to sit idle. As there are issues with both money market funds and ultra-short term bond funds, we recommend that you chose a short-term or low-duration bond fund for this purpose. Allocation should vary between 0 and 15% of an investor’s portfolio, depending on how much cash you have sitting idle, if any.

 

High Credit Risk Bond Funds

Some bond funds offer extremely high yields.  Examples are Bank Loan FundsHigh Yield Corporate Bond Funds, and High Yield Municipal Bond Funds.  Their higher yields are normally achieved by taking additional credit risk, which makes their total return performance highly correlated with the stock market.   As a result, if you chose to invest in a bond fund with a lot of credit risk, we suggest that you consider it a “stock type” investment. In other words, if you were planning to have a portfolio that was 40% bonds and 60% stocks, you should include these funds as part of the 60% stock allocation. We also suggest not allocating more than 15% of any  portfolio to high credit risk funds.

Who are high credit risk bond funds appropriate for? Investors who are looking for “equity like” returns which can have less volatility than a standard equity allocation.

 

Short or Long Duration Funds

A short or long duration fund should be composed of a diversified portfolio of  investment grade bonds and have a short or long duration.

Who are short and long duration funds appropriate for? If you have a strong view on where interest rates are headed, you might consider taking a portion of the funds allocated to your core bond fund, and re-allocating them to a fund which reflects your interest rate expectations. If you think interest rates are going to remain steady or fall, you might choose a fund which invests in investment grade bonds with long durations. If you think rates are going to rise, you might choose an investment-grade bond fund with a short duration. We recommend that you dedicate no more than 10% of your portfolio to expressing your view on interest rates.

Sample  Asset Allocations. This is just a starting point which should be adjusted according to a number of factors including your need for income and risk tolerance.

You are in a High Tax Bracket
& Don’t Have A Market View
Medium Tax Bracket
& Don’t Have A Market View
High Tax Bracket & Have A Market View Medium Tax Bracket & Have A Market View
Stock Allocation 60% 60% 50% 50%
Core Bond Fund 20% 40% 10% 30%
Municipal Bond Fund 20% 0% 20% 0%
Low Duration Fund Varies Varies Varies Varies
High Credit Risk Fund 0% 0% 10% 10%
Short Or Long Duration Fund 0% 0% 10% 10%
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