Most bond investors don’t need to aggressively manage their portfolios, but bonds do need to be at least supervised. Interest rates change, tax losses can be harvested and, given enough time, long maturity bonds turn into short maturity bonds. The creditworthiness of those companies and governments that issued your bonds may have changed dramatically too. If you haven’t been monitoring your bonds for a while, you might want to review this checklist to see if you’re earning less than you could or taking on more risk than you originally intended.
Has your tax bracket changed?
Bonds issued by governments (all the way from the federal government down to the village) frequently carry tax advantages. The IRS allows this to encourage investors to loan money to public sector. Corporate bonds don’t have any tax advantages, but usually pay more for the same maturities and risks to offset the income taxes. Check to see if you are in the right kind of fixed income for your tax bracket.
Have the bond issuers’ creditworthiness changed?
Companies’ and governments’ fortunes change over time, and their abilities to pay their obligations evolves, too. The safer the bond, the more the bond is worth. The easiest way to check on a bond’s quality is to check their credit rating. The top agencies that review fixed income are Moody’s, Standard and Poor’s and Fitch. Once you have and understand those opinions, you can decide whether your portfolio carries too much risk or even if you could accept more risk in exchange for additional income.
Should you swap maturities?
At the moment there isn’t much yield difference between long-term and short-term maturities. That’s because fixed income buyers have been rushing to lock in yields. Their bet is that yields might fall even more. But the longer the maturities, the more risk there is in price. You might want to examine whether you can either increase yields or safety by swapping maturities.
Can you harvest a tax loss?
This great big bull market we’ve enjoyed might have helped you pile up some hefty capital gains this year. Fixed income has also done quite well. But you might have a bond that’s showing as a loss. You can easily sell that bond and buy a very similar one to maintain the same risk and income while reducing your capital gains exposure.
Bond fund or individual bonds?
Fixed income mutual funds1 often do much of this work for you, but they can be costly. Broadly speaking, if you have over $100,000 in fixed income funds and plan on holding that position for the long term, you should check to see whether owning individual bonds could be more cost-effective in the long run.
Are any changes worth the cost?
Bond transactions cost money. Dealers buy bonds at a “bid” price and then resell them at an “offer” price. The difference between the two is the dealer’s profit and is lost to the bond buyer. Treasuries carry very low costs compared to high yield corporate bonds. Always consider trading costs when making any investment decisions. If you aren’t sure, then ask.
1 The fund’s yield, share price, and total return change daily and are based on changes in interest rates, market conditions, other economic and political news, and on the quality and maturity of its investments. In general, bond prices rise when interest rates fall, and vice versa. This effect is usually more pronounced for longer-term securities. You may have a gain or loss when you sell your shares.