Why Own Bonds in a Diversified Portfolio

Bonds are an important asset class to own in a diversified portfolio. Bonds offer many benefits such as providing a stable income, relatively better safety with high-quality bonds, preservation of capital, etc. Another important point to note about bonds is that they tend to cushion a portfolio during adverse equity markets. To put it in a different way, traditionally when stocks decline bonds tend to go up and vice versa. So depending on an investor’s long-term goals and risk tolerance, a small amount of bonds can be added to a portfolio consisting of various asset classes.

I came across an article in the journal last month that noted bonds also fell in 2022 when equities plunged. It was the first time this happened. From the piece:

Bonds helped offset some of the pain of the previous market crises, including the bursting of the dot-com bubble in 2000, the global financial crisis of 2008 and the short-lived market panic brought by the onset of the Covid-19 pandemic.

That didn’t happen in 2022. An index that largely holds Treasurys, highly rated corporate bonds and mortgage-backed securities fell 13%, posting its worst year on record, while the S&P 500 declined 18%.

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Source: The 60-40 Investment Strategy Is Back After Tanking Last Year, WSJ

Related ETFs:

  • SPDR S&P 500 ETF (SPY)
  • Vanguard Total Bond Market ETF (BND)
  • iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)

Disclosure: No positions

The Two Fast-Growing Money Market Funds

Money market funds have become one of the attractive asset classes to own this year. Some of these funds are yielding between 4% to 5%. The extreme volatility in the equity markets and investors’ looking for decent yields are helping these funds gain huge inflows. Though these funds are not FDIC-insured and have risks investors are still pouring billions into them.

With that brief intro, let’s take a quick look at the top two money market funds.

The top two finds based on year-to-date inflows are the Vanguard Federal Money Market Fund (VMFXX) and the Schwab Value Advantage Money Fund-Investor Shares (SWVXX) according to a recent journal article.

1.Vanguard Federal Money Market Fund (VMFXX):

This fund has an asset base of over $240 billion and currently has a 5-day SEC yield of 5.02%. The expense ratio is 0.11%. However the fund has a minimum investment of $3,000.00. Dividends are paid out monthly.

2.Schwab Value Advantage Money Fund-Investor Shares (SWVXX)

SWVXX has total net assets of over $120.0 billion. The expense ratio is a bit high at 0.35%. The current 7-day yield is 4.90%. Similar to the Vanguard fund, this fund also pays dividends monthly.

Source: What Investors Should Know About Money-Market Funds and CDs

Disclosure: Long SWVXX