Cortazzo also appreciates the value of bond investments that don’t correlate with equity risk. That doesn’t, however, preclude him looking at more risky bond sectors, such as high-yield and emerging markets debt, despite their strong correlations to stocks in bad markets.
“If the purpose of owning bonds is to mitigate the risks of U.S. equities, then [high-yield and emerging markets] won’t help in a down market,” he said. “But there are plenty of times when high-yield or emerging markets have done well when stocks haven’t.”
Given the extremely low yields over the past decade, he believes it’s worth considering higher-risk/-reward investments. “I don’t disagree with the idea of taking most of your risks in the stock market, but bonds aren’t paying much, so all your gains are being driven by stocks,” he said. “I want something else that contributes.”
With that said, he does not think the returns are currently enough to warrant taking the risk. With credit spreads still tighter than historical averages, investors could get burned reaching for yield.
“People could be picking up pennies in front of the steamroller,” said Cortazzo. “High-yield and emerging markets debt hasn’t gotten really whacked in a while.”
President, Glassman Wealth Services
There are three approaches to investing in fixed income, suggests Barry Glassman, head of Glassman Wealth Services. “There is a traditional, tactical or diversified approach,” he said. “I’ve chosen to be less tactical as time goes by.”