Are Millionaires growing more risk adverse when it comes to corporate bonds? New Millionaire Corner research finds that the share of Millionaires investing in individual corporate bonds has fallen over the past four years, while the share investing in bond mutual funds has grown.
Millionaires appear to be in a moderate to conservative mood in general, expressing a roughly equivalent preference for investing in checking and savings accounts (56 percent) and equities (55 percent) in 2013, according to our fourth quarter study of financial product ownership among affluent investors.
The share of Millionaires owning individual corporate bonds fell from 23 percent in 2008 to 18 percent at the end of 2012. The average amount invested in individual corporate bonds has fallen as well, from $119,000 to $99,000 over the same time period. As the appeal of individual corporate bonds declines, the share of Millionaires investing in bond mutual funds has grown from 24 percent in 2008 to 28 percent in 2012. The average balance in bond mutual funds grew from $116,000 in 2008 to $141,000 in 2012.
Corporate bonds typically offer higher yields than comparable fixed-income products, such as Treasuries, municipal bonds or bank deposits, according to SIFMA, the Securities Industry and Financial Markets Association. “This high-yield potential is, however, accompanied by higher risks.”
In addition to higher yields, corporate bonds offer the advantages of investment diversity and liquidity, according to SIFMA. Safety is evaluated by ratings agencies that consider a firm’s ability to repay debt obligations, and highly rated corporate bonds can be a source of dependable income.
The chief risk posed by individual corporate bonds is credit risk, the likelihood of default. Bond mutual funds can help reduce credit risk by offering broader diversification than individual investors can normally achieve on their own. “This greater diversification is possible because a bond fund generally has a larger pool of investable assets,” according to investor insights from the mutual fund provider, Vanguard. “Although diversification can never eliminate the risks of investing, broad diversification reduces nonsystematic risk that comes from owning either too few securities or securities with similar characteristics.” Bond mutual funds also offer more liquidity, but charge investments fees and fluctuate in value.
Investment-grade and high-yield corporate bonds benefitted from the economic trends that prevailed through 2012, including extremely low interest rates, economic growth and improving fundamentals of U.S. companies, but some analysts warn of a limited upside to corporate bonds in 2013.