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Bonds: Defense, offense, and strategies in between

October 30, 2013

What to do about bonds? Many ideas have been put forth over the years about how to invest in bonds in a low-yield environment.

Whether you choose a strategic asset allocation or consider a tactical move such as shortening a bond portfolio's duration or overweighting high-yield bonds, you'll find there are pros and cons to every tactic. (Duration is a rough measure of how much a bond or bond fund's price is likely to fluctuate against a change in interest rates; the higher the duration number, the more sensitive your bond investment will be to changes in interest rates.)

Key points

Bonds remain one of the best diversifiers of equity risk.

Every bond-investing strategy has pros and cons.

Vanguard believes investors are best served through broad diversification using low-cost bond funds.

No matter what strategy you decide on, you can reasonably expect bond returns in the near future to be muted relative to bonds' historical performance.

However, despite lower return expectations, bonds remain one of the best diversifiers of equity risk, and they still can play an important role in a portfolio.

Brian Scott"Clients are better served by a broadly diversified asset allocation strategy using low-cost bond funds rather than one that attempts to respond to potential interest rate movements," explained Brian Scott, a senior investment analyst with Vanguard Investment Strategy Group. "Just because rates are currently low, it doesn't mean that they can't go lower or must go higher."

To help you understand your bond-investing options in light of today's uncertain interest rate climate, we've collected a variety of informative articles, videos, and blog posts by Vanguard experts in our special section on the bond market. We've also compiled a series of short position papers that highlight considerations for some of the most pressing issues of the day. Though written for financial advisors, these briefs offer useful insights for any investor.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Investments in bond funds are subject to interest rate, credit, and inflation risk.
  • Investments in securities issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
  • Diversification does not ensure a profit or protect against a loss.
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