Want to De-Risk? Look to High Yield

Looking for a tactical way to de-risk your portfolio? You might consider rotating a portion of your equity allocation into high-yield bonds.

Yes, you read that right. It may take a minute to process, since buying high yield is usually thought of as a way to add risk. And with risk assets bearing the brunt of the recent market sell-off, adding risk is the last thing many investors want to do right now.

Here’s what you may not realize: when combined with stocks, high yield can reduce overall risk without sacrificing much return.

Want Lower Volatility? Consider High Yield

In fact, by shifting a modest allocation away from US equities and into US high yield, investors can actually boost risk-adjusted return potential (Display).

How is this possible?

First, high-yield bonds provide investors with a consistent income stream that few other assets can match. This income—distributed semiannually as coupon payments—is constant. It gets paid in bull markets and bear markets alike. It’s the main reason high-yield investors have historically looked at starting yield as a remarkably reliable indicator of future returns over the next five years—no matter how volatile the environment.