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Consider when to extend the duration of the bond
While it’s difficult to predict future interest rate cuts, Kyle Newell, a certified financial planner and owner of Newell Wealth Management in Orlando, Fla., said he has begun to shift bond allocations.
When building a bond portfolio, advisors consider the so-called duration, which measures the bond’s sensitivity to changes in interest rates. Expressed in years, the duration factors in the coupon, the time to maturity, and the yield paid over the period.
As interest rates have been rising in 2022, many advisors have opted for bonds with a shorter duration protect portfolios from interest rate risk. But allocations can shift depending on the Fed’s future policy.
“I don’t want to be too aggressive with increasing duration,” Newell said. “Because bond clients tend to be more conservative and it’s really about protecting the principal.”
Look for “areas of opportunity”
As policy changes, advisors are also looking for ways to optimize allocations amid continued economic uncertainty.
“There are still areas of opportunity in the bond market that are very attractive on a fundamental basis how poorly the bonds performed in the past year,” said Ashton Lawrence, CFP and principal at Mariner Wealth Advisors in Greenville, South Carolina.
“We’re always looking to find a sale or a discount,” Lawrence said, noting that high-quality discount bonds have built-in growth unless the asset defaults. “You’re capturing that appreciation while you’re getting paid,” he said.
Of course, every investor has different needs, Lawrence said. “But there are certainly some areas of opportunity in fixed income.