How to Protect Against Bond Risks

Step-by-Step Guide

1. 1

   Step 1: Choose bonds with a solid rating and credit ranking.

   Do some research on the Standard and Poor’s Ratings Service for current bond ratings and the Municipal Securities Rulemaking Board's (MSRB) Electronic Municipal Market Access (EMMA) website.
   
   A bond with a rating of Bb or higher has been issued by a company found to be in good credit and financial standing.
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   Step 2: Ask your broker for information on the disclosure methods and history of the bond issuer.

   An issuer that fails to supply information on its current financial status should be considered a high risk. , Do not place more than ten percent of your total investment funds into one bond.
   
   Choose bonds in a range of industries to prevent high losses from one industry's fluctuations. , These represent higher risk.
   
   You might choose just one high-yield bond with a value of less than five percent of your total investment portfolio.
   
   Place no more than 15 percent of your total investments into a specific high-yield industry. , Laddering is a process of holding short-term, medium-term and long-term bonds to protect your funds from changes in interest rates (since the longer the term of a bond, the more sensitive it is to changes in market interest rates).
   
   This allows you to continue the ladder strategy by taking the principal of a maturing bond and investing it in a new bond. , This will lessen the chance that any one risk will hurt you significantly.
   
   Choose basic stocks, indexes and exchange-traded funds to create a diversified portfolio. ,, A bond's length (measured in years) will correspond to its interest rate sensitivity.
   
   The shorter the bond, the lower its interest rate risk.
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   Step 3: Protect against bond risks by diversifying your bond holdings.

4. 4

   Step 4: Minimize the number of high-yield bonds in your portfolio.

5. 5

   Step 5: Follow a ladder strategy to manage the risk level.

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   Step 6: Invest some of your money in securities other than bonds to expose yourself to a variety of risks.

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   Step 7: Stay up-to-date on current financial news to evaluate economic factors that may affect the bond market.

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   Step 8: Choose a bond length that makes you comfortable.

Detailed Guide

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