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Posted by on Apr 2, 2014 in Sage Advisory Services

Not All Bonds Diversify Stock Portfolios

By: Sage Advisory Services, Portfolio Manager of the AdvisorShares Sage Core Reserves ETF (HOLD)   We talk to a lot of investors who own bonds to offset the risk of their equity holdings. However, just because an investment claims “fixed income” status, that doesn’t mean it provides much diversification versus equities. Case in point: high yield bonds. High yield corporate debt generates returns that are highly correlated to the returns of stocks, and it is for that reason that we regard them as a kind of “equity light” or “decaf equity.”Although their returns are not usually as volatile as stock returns, they tend to move directionally the same. So, for those investors who hold high yield hoping that they will be protected during a bear market, think again. When stocks correct, high yield debt tends to follow. Additionally, over shorter intervals such as rolling 3-month and 6-month periods, their correlations periodically spike up to surprisingly high levels. Remember 2000 and 2008? By contrast, high quality bonds such as investment-grade...

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