BONDS

Bonds provide preservation of capital, income and portfolio diversification, reducing volatility relative to all-stock portfolios. Bondholders earn interest payments in exchange for their loan to the borrowing entity—typically a government, municipality or corporation—in addition to the safe return of their principal upon maturity of the loan. Many investors are willing to accept lower expected returns in exchange for the safety bonds provide.

We focus primarily on bonds of the highest quality—those issued or backed by the U.S. Government. In times of financial crises, U.S. Treasury bonds provide the greatest level of protection. To enhance portfolio diversification and to protect against inflation, we add Treasury Inflation-Protected Securities (TIPS). As the interest from Treasuries and TIPS is taxable, these bonds are held in clients' tax-deferred accounts whenever possible.

For clients in the highest tax brackets, municipal bonds can be a sensible complement to Treasury bonds. Because of the very low historical default rates on municipal bonds, adding both national and state-specific municipal bonds to an allocation of Treasuries and TIPS can enhance a portfolio’s after-tax yield without sacrificing its safety and stability.

Bond funds are frequently used for clients because their price efficiencies and diversification benefits often outweigh the lower costs associated with holding individual bonds. Vista generally uses index funds to minimize expenses and the risk of underperformance.