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Subject:  How Many Bonds? Date:  11/12/2012  12:18 PM
Author:  trader2012 Number:  34489 of 35868

The bond market is closed today (for Armistice Day), but other markets are open. So it’s a working day for me, as is every Monday, and I was poking around at E*Trade when I noticed a link to a paper published by Bond Desk on “estimating the number of individual bonds required to minimize the impact of default risk”. Here’s a snippet:

“Another implication is that credit quality is more important than individual security selection. A diversified portfolio of 10 or more investment grade bonds (rating grades between AAA-BBB) should be protected against extreme default losses. “

As you work your way through the paper, you cannot but be impressed with the thoughtfulness of their methodology. But when you reach their conclusion (that just ten bonds might be enough to keep you out of trouble), you should conclude that the paper is either wishful thinking, or mere cleverness, but it certainly is not a responsible effort to manage risk. In short, it is nothing that you’d want to use as the cornerstone of your risk-management policy. To see why/how this is