    I wonder how many people really use fixed income within their portfolios? I don’t mean cash, money market or bank savings accounts, but specifically fixed income in terms of bonds or bond funds. Some investors, especially retirees and those who need an income stream later in life choose to establish laddered bonds in their brokerage accounts, or accounts managed by their brokerage firm. Many fixed income investors “ladder” their bonds at different maturities to provide diversification over time. Others choose bond funds, or balanced funds for their bond exposure. Obviously with fixed income you have many choices… treasuries, municipals, corporate bonds, mortgage bonds, etc.Â
But I have a friend with a 40/60 portfolio of stocks to bonds, and they are questioning their exposure to the mortgage market in today’s climate. In this person’s case they have a laddered bond portfolio with a combination of municipals, corporate and mortgage bonds. Overall a very sound portfolio with a solid income stream.  Within the portfolio there is one AAA rated bond which is a Collateralized Mortgage Obligation by a leading national banking institution. AAA-rated bonds are considered very strong historically, yet with the subprime mortgage fallout and potential downgrading of B series and even AA or A rated bonds, it makes one question the strength of the AAA rated bonds for anything mortgage related. Is this a risky bond in that individual’s portfolio? Probably not in terms of default risk, because it’s a “plain vanilla” CMO, and not a derivative or floater CMO. But in today’s bond market climate, do we really know?Â
If I were leaning toward a fixed income portfolio right now, I would probably avoid anything mortgage-related. That may sound like heresy to many broker-dealers, but there are a lot of better options out there in my opinion. If you or someone you know is investing in mortgage bonds, you might want to take a second look at exactly what you’re invested in. This story illustrates how one brokerage firm went under, and took a lot of client’s assets with it. For my portfolio I’ll stick with balanced mutual funds for bond exposure. No guarantees perhaps, but the inherent diversification works in your favor over time.
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