OPENCIRCLE WEALTH PARTNERS
Rather than trying to predict macroeconomic forces that
are difficult to foresee, investors can look to the market to
set prices and focus on the variables within their control.
START WITH A CLEARLY DEFINED GOAL
Fixed income choices should follow a broader investment
strategy that defines the role of fixed income in a portfolio.
The portfolio can then be customized to meet those specific
goals while managing tradeoffs.
The chart below illustrates how portfolio objectives can
influence a fixed income approach. An investor who wants
to seek to avoid losing market value might have a different
fixed income allocation from someone who wants to take a
balanced approach, needs immediate income, or is seeking
higher returns. Investors with different objectives typically
have different tradeoffs regarding risk, expected return,
KNOW WHAT YOU OWN
Strive for transparency in a portfolio. is means
understanding an investment manager’s basic strategy
and knowing how the instruments held in the portfolio
might respond in dierent economic, market, and interest
Unfortunately, investors who chase performance oen make
their investment decisions based on the past performance
and perceived popularity of the strategy. For example, some
of the mutual fund categories experiencing the heaviest
inows of cash in the industry are in asset groups that have
recently experienced higher than average yields. Higher
yields are typically accompanied by higher risks. But do
investors know what risks their managers are taking to
deliver those attractive yields?
UNDERSTAND THE TRADEOFFS
When reaching for higher yield, investors should carefully
consider the potential eects of their decisions on expected
portfolio performance and risk. In the xed income arena,
investors have two primary ways to increase expected yield
and returns on bonds. ey can:
(take more term risk).
ese may be reasonable actions. But pursuing higher
income means accepting more risk, as measured by interest
rate movements, price volatility, or greater odds of losing
value if the issuer defaults.
As shown in the graph below, higher yield can also bring
potentially higher volatility. Note that high-yield bonds (as
represented by the Barclays US Corporate High Yield Index)
have exhibited more volatility relative to other bonds.
2. CRSP data includes indices of securities in each decile as well as other segments of NYSE securities (plus AMEX equivalents since July 1962 and
NASDAQ equivalents since 1973). The Barclays US Corporate High Yield index measures the performance of ﬁxed-rate, non-investment grade
debt. The Barclays US Aggregate Bond Index measures the performance of the investment grade, US dollar-denominated, ﬁxed-rate taxable bond
market. The BofA Merrill Lynch One-Year Treasury Note Index measures the performance of US Treasury notes. The index is representative of the
universe of ﬁxed-rate, non-investment grade debt. Indices are not investment products available for purchase.
Indices are not available for direct investment; therefore, their
performance does not reﬂect the expenses associated with the
management of an actual portfolio. Past performance is not a
guarantee of future results. Barclays data provided by Barclays
Bank PLC. CRSP data provided by the Center for Research in Security
Prices, University of Chicago. BofA Merrill Lynch Indices are used
with permission; copyright 2012 Merrill Lynch, Pierce, Fenner &
SmithIncorporated; all rights reserved. Merrill Lynch, Pierce, Fenner
& Smith Incorporated is a wholly owned subsidiary of Bank of
HIGHER YIELD OFTEN COMES WITH MORE VOLATILITY
Monthly Growth of Wealth, July 1983–July 2012
For illustration purposes only.
INVESTMENT OBJECTIVE HELPS DETERMINE
FIXED INCOME’S ROLE IN A PORTFOLIO
OBJECTIVE ROLE OF FIXED INCOME
Avoid losing money
Keep portfolio in balance
Meet income needs
Seek higher returns
CRSP Deciles 1-10 Index (market)
Barclays US Corporate High Yield Index
Barclays US Aggregate Bond Index
BofA Merrill Lynch 1-Year Treasury Note Index
1983 1987 1991 1995 1999 2003 2007 2011