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The latest issue of T. Rowe Price Investor has the following suggestion for sub-asset class diversification within Fixed Income:
70% Investment Grade Bond
20% High-Yield Bond
10% International Bond
It's the High-Yield part I want to talk about. I have stayed away from High-Yield bond funds in my FI allocation. Thoughts were that High-Yield bonds, if corporate in nature, would tend to track equities more than non-H-Y bonds would. If business conditions deteriorated, and equities were going down, then the companies whose bonds were deemed H-Y in nature were by definition out on the risk fringe, and thus likely to run into problems, maybe big problems!
So, it seems to me that adding H-Y bonds to FI is just an attempt to goose returns on the FI side, but also increases the correlation with equities (bad).
I would think that boosting the FI <--> Equity correlation is the last thing I would want to do, right? If I expect my equity side to be the growth powerhouse, why would I want to pollute my FI side by stepping out further on a FI branch that swings with the equity wind?
T. Rowe Price is usually pretty conservative in their writings. Am I missing something on the topic?
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-- Telly, the D-I-Y guy --
Two fools dancing on the hands of time
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