A Simple Conservative Fixed-Income Portfolio ~ market folly

Wednesday, February 4, 2009

A Simple Conservative Fixed-Income Portfolio

Wanted to take a second and highlight a simple fixed income portfolio. For those who are too busy to actively manage their portfolio in this crazy market, there's a simpler, "set it and forget it" type of portfolio for generating income. Such a portfolio was just highlighted as a conservative option recently in Kiplingers. They write,

"William Larkin, fixed-income portfolio manager at Cabot Money Management, in Salem, Mass., says his portfolio was originally designed for conservative clients who wanted conservative investments.

These days, though, he finds that many clients who hadn't considered themselves conservative in the past are now interested in fixed-income investing only. This portfolio represents all parts of the fixed-income market at the lowest possible cost, he says, and recently yielded 6.3%. It also has a healthy slug of inflation protection, which is particularly reassuring given all the money that's being printed for various government stimulus and rescue plans around the world.

Larkin's portfolio:

25% iShares Barclays Aggregate Bond ETF (AGG) (Tracks a broad index of high-quality U.S. bonds)
25% iShares iboxx $ Investment Grade Corporate (LQD) (Tracks an index of the most liquid, long-term corporate bonds)
10% Fidelity Floating Rate High Income (FFRHX) (Invests in floating rate bank loans that automatically adjusts to rising short-term interest rates. It offers additional inflation hedge)
10% iShares MBS Fixed Income (MBB) (Tracks a broad index mortgage-backed securities)
7.5% SPDR DB International Govt Inflation-Protected Bond (WIP) (Invests in an index of non-U.S., inflation-linked bonds)
7.5% PowerShares Emerging Markets Sovereign Debt (PCY) (Tracks an index of emerging markets government debt)
7.5% iShares Barclays TIPS Bond (TIP) (Tracks an index of inflation-protected, U.S. Treasury securities)
7.5% iShares Iboxx $ High Yield Corporate Bond (HYG) (Tracks an index of high yield bonds)"

We actually wouldn't change much up with this portfolio. We'd obviously alter the percentage weightings based on age, retirement date goal, and risk tolerance. But, overall, this is a pretty solidly constructed portfolio for a conservative yield-seeking investor. And, you could substitute some other vehicles in there for other exposure as well. We definitely advocate a position in TIP for those desiring protection from the (in our mind) impending inflation. Also, LQD offers a decent yield from corporate bonds of many blue chip companies that aren't as risky. Blend in the corporate bond exposure from LQD with some exposure to HYG for exposure to riskier, higher yielding corporate bonds as well. Those are definitely our three favorite instruments in this portfolio. Emerging Market debt is also a very interesting play that theoretically could be enticing here, but we haven't done enough work in that area yet to really comment further on it.

You can view the entire post: Three Simple Portfolios.

Full Disclosure: market folly was long LQD at the time of publication

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