Questioning Your Bonds? 3 Questions to Ask Your Advisor

by on October 7, 2014

Uncertainty is in the air, particularly if you’re a fixed income investor. As BlackRock’s Chief Investment Strategist Russ Koesterich wrote earlier this week, bond investing is different today than it was in the past. And that may well mean that what you were doing in the past, doesn’t work quite the same (or as well) as it used to.

This is precisely one of those times you should be talking with your financial advisor. What should you ask him/her? Three things (at least.)

1) Does a changing market mean it’s time to change my fixed income portfolio? The answer might be yes. Your financial advisor can help you assess your current fixed income allocation to determine not only the types of bonds you hold, but the types of risk. Fixed income investing comes with two primary risks: interest rate risk (the risk a bond will lose value as interest rates rise) and credit risk (the risk that a bond issuer will default and be unable to make payments to bondholders). Different types of bonds will carry these risks in different degrees. You should be aware of those differences and how they manifest in your portfolio. You’ll also want to assess the current economic and market environment to help you discern which risk may be looming larger. Knowledge is power — you need to know what you own, inside and out. Your advisor can help you evaluate whether the tools you are using are well suited for the job you want to get done — and importantly, for the current investment backdrop.compass

2) What are my fixed income options today? The environment for income seekers is not as plain vanilla and one dimensional as perhaps it once was. In today’s low-yield world, U.S. Treasuries aren’t likely to provide the level the income you seek all on their own. Fortunately, there are ample tools available for fixed income investors today, and you want to ensure you are using them to your greatest advantage. You might consider unconstrained income strategies, international bonds, municipal bonds, exchange-traded funds (ETFs) or, ideally, a blend of passive ETFs and active strategies that allows you greater flexibility and enhanced affordability in managing your market exposures. Equally important: working with an investment manager who is able to offer you these options and the expertise to navigate the prevailing landscape.

3) What if I’m not ready to make my move? Your readiness for change will likely depend on a number of factors, including the current composition of your fixed income portfolio, your relative exposures to interest rate and credit risk, your comfort with your investment manager and, of course, your own time horizon and risk tolerance. If you want to move out of a position, but have nowhere to go…or nowhere that you’re comfortable with just yet, consider using exchange traded funds (ETFs) as a transition vehicle. Because ETFs are liquid and have low transaction costs, you can transition out of a worrisome position while still maintaining market exposure in the ETF as you do your due diligence in planning your next move.

Ultimately, headlines can be alarming and can stoke market volatility. But bonds have an important place in an investment portfolio. They provide ballast to your equity holdings, and stand as an important source of income. The uncertainty of the moment should not lead you out of this vital asset class, but instead encourage you to work with your financial professional to ensure you are using the fixed income markets to their fullest potential — and your greatest benefit.

Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group. He provides practical information on topics that are important to every saver and investor of every age. 

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective. The information provided is not intended to be a complete analysis of every material fact respecting any strategy. The examples presented do not take into consideration commissions, tax implications or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification and asset allocation may not protect against market risk.

©2014 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.