Abstract
The bond market has come a long way since 1970, when prices were fairly stable and the types of bonds were quite limited. So dull was the bond market prior to 1970, that many investors still remember when they were told that bond exposure should be proportional to one’s age. If you were lucky enough to have lived to the ripe age of 80, then, according to this old adage, you should have 80% of your investments in bonds. Likewise, this rule of thumb limits your exposure to bonds to 20% if you are only 20 years of age.
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Notes
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The U.S. Federal Reserve, along many other central banks around the world, has kept benchmark interest rates near zero since the 2008 financial crisis.
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A buy-and-hold strategy is not to be confused with a static investment strategy. It recommends diversifying away from securities when the fundamentals that led to their purchase in the first place have changed significantly, or when a security has become grossly over-valued. But, by and large, it ignores short-term market fluctuations. It is also important not to confuse a buy-and-hold approach with value investing. The latter strategy focuses rather on undervalued securities, and its practitioners are not averse to selling a security regardless of its fundamentals.
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SPIVA has published semi-annual reports for the U.S. market from 2003 to 2006 and for the period starting with 2008.
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Watson Wyatt merged with Towers Perrin in 2009, creating Towers Watson.
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The Barclays U.S. Treasury Index, which used to be called the Lehman Brothers U.S. Treasury Index, is now maintained by Barclays Capital, which took over the index business of the now-defunct Lehman Brothers. The index measures the performance of the Treasury bonds (all public obligations of the U.S. Treasury, excluding flower bonds and foreign targeted issues). Also currently maintained by Barclays is the well-used Lehman Aggregate Bond Index, a 1973 co-creation by Art Lipson and John Roundtree of Kuhn Loeb & Co.
- 24.
Another index captured with the Lehman acquisition, it measures the performance of below investment-grade corporate bonds issued in the United States.
- 25.
For more information, see Eugene Flood, Jr., and Narayan Ramachandran, “Integrating Active and Passive Management,” Journal of Portfolio Management, (Fall 2000), pp. 11–19.
- 26.
Bonds rated below BBB are considered non-investment grade.
- 27.
Many European banks forced to shrink their balance sheets in the wake of the 2008 crisis have reduced their loan commitments to companies.
- 28.
High-yield bonds are more sensitive to interest rates only when credit spreads are narrow, a situation caused by high demand from investors particularly seeking such bonds in their quest for higher yields.
- 29.
These baseline portfolios are considered ideal because they take into consideration differences in tax rates from one investor to the other, different perceptions regarding earnings expectations, tolerance toward inflation and types of assets investors are willing to hold, and so forth. Since no two clients are alike, it is entirely possible that for each one of them, one would have to construct a baseline portfolio of individual bonds that must be assigned some relative weight based on the risk tolerance of the client, and track these over time.
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Meziani, A.S. (2016). Understanding the Complex Universe and Role of Fixed-Income Funds as Investment Vehicles. In: Exchange-Traded Funds. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-39095-0_4
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DOI: https://doi.org/10.1057/978-1-137-39095-0_4
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