This site uses cookies to provide you with a great user experience. By using BondbloX, you accept our use of cookies.
How much should I allocate to bonds in a portfolio?
Now, the pertinent question arises where an investor tries to determine how much and which bond he/she should invest in. Since everyone’s needs and requirements are different, there is no single formula or process that fits all investors’ needs. However, the decision to identify and invest in bonds could basically be guided by ‘risk appetite’ or the amount of risk that individuals are willing to take to achieve their objectives.
Risk appetite is typically based on the following:
- Age – A simplistic way of approaching investing is to allocate a percentage that represents one’s age into bonds. For example, if one’s age is 30, then 30% of his/her portfolio must be in bonds and the remaining in stocks. Whilst this is just a start, one can definitely deviate from the above allocation based on their net worth, assets held and several other factors based on the particular individual.
- Time Horizon – There are broadly three time horizons that one may look at investing in bonds for – short-term (up to 2 years), medium-term (2-10 years), long-term (more than 10 years). Short-term bond investments may reduce the volatility in the portfolio but may also offer lower yields in a normal interest rate environment. Long-term bonds are more volatile but may offer higher yields. The trade-off depends on the broad expected return that an individual seeks to make on the portfolio.
- Assets & Liabilities - Individuals may look their upcoming expenses/liabilities and invest an amount proportional to the present value of such outlays. Also, an existing base of high value net assets may see an investor take more risk since he/she would have a bigger cushion against any potential losses.
- Alpha – Alpha refers to the excess returns that an investor wants to make over and above a benchmark index. This may see higher risk taking whereby he/she may go into lower quality bonds to enhance returns, albeit with higher credit, liquidity and other risks.
After the risk appetite is determined, investors can choose how they want to allocate their funds among investment grade and high yield bonds to have a well-balanced portfolio.
Get the latest news on bonds
Receive curated global bond market news directly in your inbox everyday to stay updated
Learn more about Bond Investing
BondbloX Pte. Ltd. is regulated by the Monetary Authority of Singapore as a Recognised Market Operator ("RMO") and exempted from Section 49(1) of the Securities and Futures Act (Cap. 289) ("SFA") under Section 49(7) of the SFA.