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Specializing in retirement planning and personalized investment management.

Bond Side of Portfolio

On the bond side of the portfolio, one of the ways to take a more of an aggressive stance would be to own more bonds that have lower credit quality (bonds that are considered riskier).

Ratings of Bond Credit Quality

Moody's Ratings S&P Ratings Rating Descriptions
Aaa AAA Prime Investment Grade
Aa1
Aa2
Aa3
AA+
AA
AA-
High Grade
A1
A2
A3
A+
A
A-
Upper Medium Grade

Baa1
Baa2
Baa3

BBB+
BBB
BBB-
Lower Medium Grade
Ba1
Ba2
Ba3
BB+
BB
BB-
Non-Investment Grade Speculative Non-Investment Grade
(high-yield /junk)
B1
B2
B3
B+
B
B-
Highly Speculative
Caa1 CCC+ Substantial Risks
Caa2 CCC Extremely Speculative
Caa3
Ca
CCC-
CC
Default Imminent, Recover % Slim
C D In Default

Most high yield bond funds are already in the risky Ba - B / BB – B grades (Moody’s / S&P Ratings). There are some funds that invest substantially in below B ratings, but we don’t recommend dipping down that far, so we usually don’t adjust our high yield component.

U.S. investment grade bonds, however, are typically A2 / A or higher. By dropping down to Baa2 / BBB (lower medium grades), there are opportunities for more return while still keeping that “investment grade” label.

Global bond funds are similar to the U.S. investment grade bonds. We usually use funds that are in the top half of the broad investment grade ratings. There are funds we can use to target the lower half as well though. We can also work in emerging markets debt to a global bond allocation, but most funds are below investment grade so you’re essentially holding lower quality bonds from less economically developed countries. Yields are comparable to U.S. high yield bonds.

Longer Maturities

Another way to be more aggressive with bonds is to lengthen the duration / maturities of the bonds and bond funds used in the portfolio. Longer-term bonds tend to pay higher interest than shorter-term bonds. Of course, longer-term bonds also add to credit risk (default) and interest rate risk (rate fluctuations).