How Bond Funds Can Outperform Equities
Investment management has become an all-important component to investing, particularly after the past 3 years since the collapse of the US credit system. A lot of investors have taken a good, hard look at their asset allocation model and determined that their risk tolerance might be a lot lower than they might have originally believed.
Since the market caused many sleepless nights and self-doubt, the topic of risk tolerance has resurfaced, forcing both aggressive investors and conservative savers to realize that their traditional savings and wealth-building vehicles needed to change. For the conservative investor, that came with the realization that term deposits and treasuries could not be relied upon to maintain anything more than the rate of inflation.
The aggressive investor, however, also has had to revisit asset allocation with added emphasis on the income class, which aggressive investors have traditionally shunned from their portfolios in favor of more aggressive equity class investments.
The income class of a decade ago is not the same as the class today. In fact, today’s bond funds have explore greater options for income and capital appreciation than their historic counterparts. High yield investments combined with greater-volatility debt means some of these bonds respond to market triggers the way some equities do.
In fact, many high yield investments today are more volatile that many conservative equity funds, providing not only greater income stream and growth into the funds and to investors, but less overall risk than similar equity funds.
In a market where all else is equal, your bond investments will always have less risk than equity investments. The problem has been in the rating systems used by companies like S&P and Moody’s, both of which came under fire following the collateral debt obligations (CDOs) collapse in 07 and 08. Now you have B-rated bonds that just two years ago were solid investment-grade bonds. And with the spreads between corporate and government issues being wide, the individual investor stands to capitalize.
The better funds on the market will easily outperform the more-conservative equity funds. And with less trading within the fund, bond funds cost less to manage, resulting in greater savings for the investor seeking less risk.
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