Are bonds, a good tool for diversification?

Bonds are considered to be the safe spots, in a portfolio. However with the current scenario of the Treasury yield sliding down, can it still be considered as a good tool for diversification of portfolio?

Risk in bonds

The concept of using bonds as security is at stake. With the low interest rate, the Treasuries are not performing as usual. When the Federal Reserve shrinks, it will spike the yield and crush, the bond price. Thus, the long considered security about holding the bond, drains out.

Is it smart to sell the bonds?

The answer is an absolute no. In a brutal market, the drop in the bonds will be very less, when compared to the drop in other asset classes. In 2008, there was a decline of 37% in the index and in 2009 while there was a 15% decline in the long term government bonds. The highest was experienced in 1931 with a 43% loss.

It is to be understood that the Treasuries with short maturity dates are safer than long term ones. It is better to buy Treasuries with varying maturity dates or a mutual fund. The worst decline that was experienced by a one month Treasury security is 3.7%, in 1970.


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