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Bonds for All Types of Investors

August 11, 2005 By:
Money Maven with Craig G. Langweler
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As a retiree, I am overweighted in bonds because of my need for income. Because I've been told bond prices go down when interest rises, how can I protect my principal from eroding?
R.C. Philadelphia

Not long ago, many investors were concerned with rising interest rates. In fact, the No. 1 perception in the market has been that rising interest rates are the main risk to fixed-income portfolios. You've probably seen the steady climb in the Fed rate coming, and perhaps moved into less interest-rate-sensitive assets. But interest-rates are not the only risk in the fixed-income market.

One type of risk few investors have probably ever heard of is "spread risk" - associated with any fixed-income investment other than U.S. Treasuries.

The "spread" is the difference between the yield of a non-Treasury fixed-income investment and the yield offered by a similar-maturity Treasury security. Put another way, "spreads" are essentially the premium paid to investors to bear credit risk beyond the generally accepted safety of U.S. Treasuries.

Spread risks have been widening due to rising yields and falling prices on non-Treasury debt securities. While you may not be familiar with such risk, check your portfolio for potential overexposure to it.

Why reallocate fixed-income assets? Because bonds come with their own risks, there's no "best" category to weather all storms. Just as you wouldn't allow the equity portion of your portfolio to have just tech stocks or only small-cap stocks, the fixed-income portion should not be overweighted in one type of bond category.

Craig Langweiler is president of the Langweiler Financial Group, in Newtown. E-mail him at: [email protected].

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