June 19, 2017
Today’s investors face a frustrating dilemma when it comes to portfolio diversification: Traditional investing strategies dictate that investors should allocate part of their portfolios to fixed-income instruments – like bonds – to balance higher-risk investments – like equities.
“When growth assets don’t do well, bonds kick in and act as a smoothing mechanism over time,” says Eric Freedman, Chief Investment Officer for U.S. Bank Wealth Management.
However, government bond yields presently sit at historic lows – 10-year Treasury notes, for example, were hovering at just 2.3 percent as of early May, and it is unclear if returns will rise soon, says Jennifer Vail, Chief Investment Officer, Institutional and Corporate Trust for U.S. Bank Wealth Management.
Fixing to Flee
These limited returns have left investors discouraged, and many may potentially be wondering whether to abandon bonds altogether in favor of investments with a greater return. It is human nature to want to invest in assets that hold the promise of a higher return, but such decisions can have a big impact on a long-term portfolio strategy, argues Robert Haworth, Senior Investment Strategist for U.S. Bank Wealth Management.
“Migrating away from bonds may increase the volatility of your portfolio,” he says. “If you are going to do that, you have to decide how much risk you are willing to take to increase your returns.”
Before making any decisions on asset allocation, Haworth encourages investors to review their portfolio strategy with their financial advisor, with an eye on timelines, financial goals and appetite for risk — and to remember that goals don’t change just because the market is in flux.
“Now is the time for investors to think about cost, risk and long-term needs, then to adjust their portfolio plans for the current environment,” he says.