By investing in different types of bonds, you can lower your overall investment risk. Diversification may include investing in bonds from different issuers, bonds with different maturity dates, and bonds from different geographical areas.
Technically, this style of investing eliminates what is known as non-systemic risk, or risk due to fluctuations in markets and industries.
Try the following techniques to diversify your bonds.
• Invest in bonds of varying quality. By balancing risky investments in lower-rated bonds with investments in higher-rated bonds, you mitigate some of the risk associated with lower-rated bonds. Additionally, the large spread in lower-rated bonds may help buffer some of the effects of interest rates on the value of your bond portfolio.
• Buy bonds with different maturity dates to get the best of short-term and long-term returns. Short-term bonds may be performing better than long-term bonds at any given time, or vice versa. By holding money in both types, you are able to more frequently benefit from price fluctuations.
• Invest in geographically diverse bonds. Whether this is within your own country, maybe diversifying between regions or states, or between nations, you can limit a large amount of risk by purchasing bonds from different areas. For example, by purchasing foreign bonds, an American investor might be temporarily insulated from the price effects of a United States interest rate hike
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