Bond Risk
Lexington uses bond asset class diversification to lower the risk of a portfolio and for liquidity. To help to achieve higher returns in client’s account, we would normally add equity exposure.
For the period January 1964 to December 2007, to achieve a comparable increase in returns from bond portfolio (by moving to longer duration bonds) the portfolio incurs much more risk than a comparable equity change. In fact, incremental risk increases by 974 percent! (see graphic below).
Source: Dimensional Fund Advisors
Risk: 14%
Risk: 133%
60% Fama/French Total US Market Index Portfolio
40% Five-Year US Treasury Notes