Many investors, whether individual or institutional, hold a diversified bond portfolio primarily to mitigate the volatility inherent in stocks or other risky assets. However, with yields presently at or near historic lows, more investors view the bond market as abnormally risky.
Indeed, the preponderance of thought is that if and when interest rates rise, the fixed income portion of an investor’s aggregate portfolio may face volatility and loss. Coincidentally, the phrase “bond bubble” is gaining currency.
Given many investors’ concerns, we offer some perspective on the prospective risk of higher interest rates to a broadly diversified bond portfolio.
The Importance of Asset Allocation – “Financial Analysts Journal”
Roger G. Ibbotson reviews the question: What is the impact of the long-term asset allocation policy mix relative to the impact of active performance from timing, security selection, and fees?
His conclusion: The time has come for folklore to be replaced with reality. Asset allocation is very important, but nowhere near 90 percent of the variation in returns is caused by the specific asset allocation mix.