Bond Investing – Reducing Risk Exposure

    Published: 06-16-2009
    Views: 3,094
    Financial Advisor Ric Edelman discusses the basics of bond investing including how to reduce risk exposure.

    Ric Edelman: I have been warning you about interest rate risk and credit risk when investing in bonds.

    Now, I will show you how you can reduce your exposure to these risks. First, pay attention to the bond's duration. Duration refers to the average life of the bond, that's usually shorter than the maturity date.

    Long term bonds are more sensitive to rising interest rates than short term bonds, so you can cut your interest rate risk by only owning bonds that have durations or maturities of seven years or less; the shorter the duration, the lower the risk to rising interest rates.

    Second, only by bonds that are unlikely to experience cuts in their credit rating. That means you should focus on bonds that are issued and backed by the federal government. Those without are not as immune to credit risk as those issued by Uncle Sam.

    Third, don't overweight your portfolio with bonds, maintain diversification, own not juts bonds but also stocks, real estate, precious metals, oil and gas, assets that are not directly affected by changes in interest rates or credit ratings. Diversification helps when facing the challenges of the financial marketplace in turmoil.