Asset Management: Bond Portfolio Development

How do I, as a fixed-income investor, achieve a respectable rate of return without the higher risk associated with the fluctuation of interest rates?

From the late 1980s through the early 2000s, long-term bond investors have enjoyed their best decades in history, with gains averaging 12.7% per year as interest rates declined.

Unfortunately, many investors continue to consider only this most recent positive period when analyzing bond investment options. Psychologists call this "cognitive bias", the expectation that historical performance will determine future performance.

Consider the decade of the 1950s the worst decade for long-term bond investors with an average annual loss of -0.1% (with reinvested interest income; substantially lower otherwise). This practical example illustrates what can happen when interest rates rise. The volatility of long-term bonds, particularly over long time periods, approaches the volatility of common stocks.

  • How do fixed income investors achieve a respectable rate of return without experiencing the higher risk associated with the fluctuation of interest rates?
  • Further, what is an adequate tradeoff of higher risk for higher return?

These are questions that can be answered while Open Range takes into consideration your personal objectives. An investor who is using bonds as a hedge to stock investments would most likely have a different structure to their bond portfolio than would an investor who will need to have an income stream coming from investments to sustain their lifestyle.

At Open Range, each client bond portfolio is built to best meet your objectives.