Portfolio a alokace
Adding Bonds to a Portfolio: When and How Much
Key takeaways
- Bonds dampen the swings of an equity portfolio and have historically had a low correlation with equities.
- Adding bonds makes sense when you are approaching the drawdown phase or when your risk tolerance declines.
- The maturity (duration) of a bond ETF significantly affects its sensitivity to interest rates.
- Short-term and intermediate-term bonds are less volatile than long-duration ones — but offer lower returns.
- Government bonds from developed economies form a safer foundation than high-yield corporate bonds.
Bonds in a portfolio are primarily a tool for reducing volatility — not a source of maximum return. Adding them makes sense at a certain stage of life and with attention to duration and issuer type.
When to Add Bonds
Adding a bond component is relevant if:
- The drawdown date is approaching — retirement, a major expense, a financial goal
- Your risk tolerance is declining — you can no longer sit through a 30–40% drawdown calmly
- You are looking for a more stable return in combination with an equity core
A young investor with a thirty-year horizon is perfectly fine with a portfolio of 90–100% equities. An approaching retirement calls for gradually shifting some of that into bonds — typically beginning ten years before the drawdown phase.
Duration: The Key Parameter
Duration expresses the sensitivity of a bond or fund to changes in interest rates. A bond with a duration of 10 years will lose approximately 10% of its value if rates rise by 1 percentage point. Shorter duration means lower risk but also lower return. For the defensive portion of a portfolio, short to intermediate ETFs with a duration of 1–7 years are appropriate.
Which Bonds to Choose
For a core bond allocation, suitable options are:
- Government bonds from developed economies — lowest credit risk
- Global aggregate bond ETF — combines government and corporate bonds in a diversified way
- Inflation-linked bonds — protection against inflation
Avoid high-yield funds as a core defensive component — they have higher correlation with equities and behave similarly in a crisis. A broader view of bond allocation in the context of a portfolio is offered by the article on asset allocation.
How Much to Put in Bonds
It depends on age and risk tolerance. As a starting point, the age rule is widely used: your age in percent as the bond allocation. A more modern version is more aggressive: age minus 20 as the bond percentage. Both are rough guides only — what matters is your overall asset allocation and investment plan.
FAQ
Why add bonds to an equity portfolio?
Bonds have historically had a low or negative correlation with equities: when equities fall, bonds tend to be stable or rise. Adding a bond component reduces overall portfolio volatility without having to abandon equities entirely.
What is bond duration?
A measure of the sensitivity of a bond's price to changes in interest rates. A bond with a duration of 5 years will lose approximately 5% of its value when rates rise by 1%. Shorter duration means lower risk but also lower potential return.
Are corporate bonds better than government bonds?
Corporate bonds offer higher returns but add credit risk and tend to have higher correlation with equities. For the defensive portion of a portfolio, government bonds from developed economies are a more reliable foundation.