Owning Bonds

Key Takeaways

• One strategic use of bonds in a portfolio is to increase diversification.

• Diversification can be achieved

  • by an active strategy, using individual bond selection; or
  • by a passive strategy, using indexing.
• Spreads indicate the "price" or the yield on default risk.

• Matching strategies to minimize interest rate and reinvestment risks can include

  • immunization,
  • cash flow matching,
  • bond laddering.
• Life cycle investing considers the relationship of age and risk tolerance to the strategic use of bonds in a portfolio.