5 questions for bond investors to consider: Wells Fargo
Bonds can reduce the volatility of returns when used properly as part of a diversified investment strategy. And a smoother ride means investors are more likely to stay invested in the markets, which Wells Fargo considers the best strategy.
But again, it’s important to avoid having a concentrated position in a single segment of the fixed income market, as this can make portfolios more volatile.
Before choosing a bond investment that offers the highest return, investors should think about the marginal benefit of moving up the yield curve. The report notes that longer-term maturities are very sensitive to interest rates, while staying too short on the yield curve offers little return and yield.
Wells Fargo recommends medium term maturities that will generate some yield and avoid near zero yields in the shorter term.
Investors should also keep in mind that if prices skyrocket and cash flow stays the same, they might not be able to meet the expense.
Most fixed income investments only allow investors to plan for their specific cash flow needs. If they can anticipate when they will need cash for a large purchase, they can buy bonds that are near maturity when they need the money. This can be an effective way to stay invested in the markets while having confidence that money will be available when needed, the report says.
The report warns, however, that selling bonds before maturity – if a need to raise funds suddenly arises – can be costly and result in big losses if the market moves against the seller.