Bond Allocation

Investing in bonds provides an investor with a diversified investment portfolio. Every investor’s portfolio should consist of some bond component. Bonds provide stability in the portfolio and a predictable income stream.

Asset Allocation

It has become a common advise from most advisors that the percentage of bonds in your portfolio should be ‘100 – your age’. This gives you a rough idea of the importance of bonds, but should not be followed as a hard written rule. Benjamin Graham, the father of value investing, gives a simple (and in my opinion, better) rule of thumb to follow. Relative allocation between stocks and bonds should be between 25% and 75%, one way or the other. He goes on to say “any such variations should be clearly based on value considerations, which would lead [the investor] to own more common stocks when the market seems low in relation to value and less…when the market seems high in relation to value”.

My Bond Allocation

Bond allocation in my portfolio in Aug 2013 is about 11% – a relatively low value. This is because of the historically low interest rates that we currently have. The chart below shows the US 10-year treasury yield. The yields are at their lows and are already starting to creep up. When bond yields rise, bond fund prices lose value, so I have decided to keep my bond allocation to what I consider minimal.
historical bond yields

I only hold high grade near term maturity bonds as of this writing. I hold bonds using the iShares 1-5 Yr Laddered Government Bond Fund (TSE: CLF) ETF, which is composed of Canadian federal and provincial bonds maturing between 1 and 5 years.

 
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.
 

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