What You Need to Know
- Moving from fixed income into cash alternatives may not be profitable in the long term.
- People should establish an investment strategy based on how much risk they are willing to take.
- Reallocating for potentially higher returns may mean an increase in volatility.
Fixed income has an important role to play in a well-diversified portfolio, even in today’s rising interest rate environment, according to a new report from Wells Fargo Investment Institute.
The report puts forward five characteristics of bonds it says investors should consider before they make changes to their bond holdings.
Investors should judge fixed income performance by considering total return, according to Wells Fargo.
It asserts that a well-diversified fixed income portfolio will continue to outpace cash alternatives. Moving from fixed income into cash alternatives may not be profitable in the long term.
Investors should keep in mind why fixed income is part of the asset allocation before they move into more aggressive securities, asking themselves whether such a move is within their risk tolerance.
Investors should think hard before reducing or eliminating an asset class because by doing so, they may assume more risk as their portfolio becomes more concentrated. They should also diversify among their fixed income positions, as relying too much on any one credit, sector or fixed income asset class can be detrimental, according to the firm.
The report points out that reallocating for potentially higher returns may mean an increase in volatility.