If you like your portfolio’s risk level, you should keep it. The important thing is to maintain a diversified portfolio because holding different kinds of stocks and bonds will usually perform better with less volatility over time than one concentrated in a few investments.
“We are careful with diversification so that no one bond represents more than five percent of the total portfolio,” said Jeffrey Sturgis, a CFP with Brightstone Advisors in Fishers, Indiana.
Many investors use bond funds to create a diversified portfolio. Check the duration of your bond fund to make sure you are comfortable with how it will perform in a rising rate environment.
Duration is the measure of interest rate sensitivity, expressed in years. For example, the Vanguard Total Bond Market Index, the largest U.S. bond fund by assets, has an average duration of six years. That means that, if rates were to rise by 1 percentage point, this fund could lose as much as 6 percent.
“Coming off of a 30-year bond rally, many investors have never experienced a rising rate environment, let alone know how that affects their portfolio,” said Benjamin Muchler, a CFP and managing director of Boston Research & Management in Manchester-by-the-Sea, Massachusetts.