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What Is Bond Asset Allocation?

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  • Written By: Geri Terzo
  • Edited By: Shereen Skola
  • Last Modified Date: 22 November 2016
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    Conjecture Corporation
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Bond asset allocation represents the way that investors, including institutions and individuals, direct money to the fixed income asset class. There are different types of bonds, which are debt securities, that exhibit various characteristics; some have durations that are short and expire in a matter of months, while others mature in a number of decades. Also, there are varying degrees of risk associated with different fixed income investments. As a result, bond asset allocation can be a target plan or an actual exposure to the various segments of the investment category expressed as a percentage and may be illustrated as a pie chart.

An investor can set an asset allocation, which is an outline for the way that investment capital is divided, to set goals and assess the way that a portfolio is performing. At a glance, an investor can see the way that assets are dispersed or determine a target outline representing a goal for an upcoming period of time. Bond asset allocation is dedicated to the way that fixed income investments are made or will be made. An investor can create this blueprint based on a tolerance for risk and expectations for returns.

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One way that a bond asset allocation can be created is based on duration. An investor can distinguish the capital that is dedicated to long-term fixed income instruments, such as those in the 30-year duration category. The duration on a bond determines the length of the contract between a bond issuer and an investor. An allocation might also illustrate the percentage of assets that are exposed to short-term bonds, such as those securities that expire anywhere from three months to five years, for example.

Investors might also choose to create a bond asset allocation to illustrate the level of risk in a portfolio. The capital that is exposed to risky bonds, such as those considered to be below investment grade, might comprise one category. These bonds have a tendency to deliver greater returns, but also have a high probability for default, in which case an investor can lose money. Fixed income securities that are deemed safe but also achieve modest profits might make up a separate category in an investor's bond asset allocation.

When forming a bond asset allocation, an investor can illustrate the way that assets are currently divided or create a target plan. In a target asset allocation, the illustration, such as a pie chart, shows the way that the investor would ideally prefer to see capital directed in the future. It might take time to shift an investment portfolio from the way that assets are truly exposed to the targets. The bond asset allocation plan could establish the direction for a portfolio over a one-year period based on expectations for future economic conditions, for instance; these may impact bond features, such as interest rates, risk and price.

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