A bond portfolio is an investment portfolio comprised exclusively of certificates issued by corporations or governments entities seeking an infusion of cash. These bonds allow companies and governments to borrow money from the general public by promising to repay the grantor of the funds a specific interest rate over a certain period of time. There are four types of bonds that may comprise a bond portfolio: government, municipal, corporate, and mortgage. Bonds are available for purchase on the open market. Successful bond portfolio management requires the use of several strategies that can be employed by an individual or a bond portfolio manager.
Unlike a stock portfolio, which is a collection of stocks signifying ownership in a company, a bond portfolio is essentially group of loans. Government bonds are generally considered the safest of the bond groups because they are backed by the government, which, in most countries, controls the issuance of money. Consequently, the likelihood of government bonds defaulting in a bond portfolio is very low. State and local governments issue municipal bonds. Corporate bonds are issued by companies and may be safe or risky investments for a bond portfolio depending on the size and earnings of the company. Mortgage bonds are the riskiest bonds in a portfolio because they are connected to mortgage loans and are contingent on the borrower of the mortgage loan consistently making his or her mortgage payments.
Bonds may be purchased via the leading brokerage houses. Some banks also facilitate the purchase of such loans. Also, specialized retirement accounts may provide certain tax incentives if bond portfolios are kept in them.
Diversifying is an important aspect of bond portfolio management. Holding only one type of bond increases the risk for loss if that particularly company or industry experiences financial turmoil. Consequently, holding bonds from all four sectors with the majority of money allocated to the safest bonds provides a safe strategy. Risk can also be reduced by paying attention to the bond’s credit rating. The world’s leading credit agencies assess the volatility of a bond by reviewing the financial position of the issuer and assign a rating accordingly.
Also, skilled bond investors employ a strategy called laddering. Laddering involves having a bond portfolio comprised of bonds that mature at different times so that a bond matures every year and funds can be reallocated for the purchase of more bonds. This reduces the risk that all the bonds in a portfolio will default before they fully mature.