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How Do You Account for Bond Risk?

We know that investors are confronted with two big risks these days:

  1. Stocks are highly valued.
  2. Bonds yield close to nothing.

In this sort of environment it is not merely enough to underweight stocks and call it a day because this is reducing the risk in one asset class (stocks) and potentially exposing you to more interest rate risk in bonds. To account for this we actually manage our portfolios using a multi-strategy approach. This means that our equity portfolios are rebalanced in a countercyclical manner AND the bond piece is rebalanced to account for interest rate risk. This duration rebalancing approach helps to account for the high degree of interest rate risk that an investor is exposed to due to low rates.

We know that your standard 60/40 stock/bond approach will not generate the same types of returns that many investors are used to because the 40% bond piece cannot mathematically provide the returns that the bond bull market of the last 40 years has generated. Bond investors must expect lower future returns and potentially much higher risk in the case that rates rise. To mitigate this risk we rebalance our bond portfolios to account for how risky the bond piece is at times during the interest rate cycle.

In doing so, we are helping to manage the two biggest risks that investors currently face. And it’s all done in a low fee and tax efficient manner.

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