Vanguard Group is advocating bond diversification as a “prudent strategy amid interest rate uncertainty,” rather than focus on a particular fixed-income strategy, according to a statement about a new research paper from the mutual fund company.
“Investors have come to understand the conventional wisdom of diversifying stock holdings based on such characteristics as market capitalization and investment style,” Joseph Davis, Vanguard principal, chief economist and head of its investment strategy group, said in the statement about the research paper he co-authored. “The benefits of diversification in bonds are equally compelling. Investors should view the role of bonds in their own portfolios today the same as they did before the crisis and should guard against overreacting to concerns over rising rates.
In the new Vanguard research paper, “Deficits, the Fed, and Rising Interest Rates: Implications and Considerations for Bond Investors,” written by Mr. Davis and four colleagues, they believe a bond allocation that reflects the overall fixed-income market is a great, simple way “to diversify its various risks, including how interest rates of various maturities may evolve in the future.”
“A key lesson of the global financial crisis is that implementing a too-narrow or surgical bond allocation (such as by shortening duration or investing solely in riskier bond instruments) involves important tradeoffs that may expose bond investors to unintended yield-curve or market risks while potentially depriving them of a higher future income stream,” the paper stated.