Bonds: Increase Risk
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|
|Upper Medium Grade|
|Lower Medium Grade|
|Non-Investment Grade Speculative||Non-Investment Grade|
|Default Imminent, Recover % Slim|
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.
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).