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Insight
June 26, 2025
Bonds role in an investment portfolio
The level of bonds in an investment portfolio will be determined by your asset allocation strategy combined with risk preferences and income needs
Setting your asset allocation is widely considered the most crucial aspect of portfolio construction. It’s the foundation for achieving your investment goals, managing risk, and protecting wealth over the long term.
How you spread your investments across different assets will determine:
- whether you seek to preserve, build over time, or aggressively grow wealth;
- how your portfolio will perform over the long term; and
- how your portfolio managers short term volatility.
It is certainly one of the most important aspects of your investment strategy and planning, so getting it right is critical.
Put simply, asset allocation is the proportion of funds placed into various asset classes, taking into account an investor’s risk appetite, personal situation, and long-term goals.
Historically, Australian’s have tended to place a strong emphasis on local equities and property when building an investment portfolio. However, over the past 20 years there has been a significant shift towards the diversification of portfolios, both geographically and by asset class.
Over concentration in a single asset or sector may lead to short term gains, but this comes at the risk of affecting your long-term portfolio performance, as a major event has the potential to wipe out a lot of your wealth if your portfolio isn’t diversified. For example, sector crashs, such as the 2000 tech bubble and the boom-bust cycle of the resources industry, or world rattling events such as the 2008-09 global financial crisis and the 2019 COVID-19 pandemic.
A carefully weighted portfolio is more likely to outperform in the long term and offer better protection against market crashes or downturns.
What types of assets may be considered in a portfolio?
On the growth side, assets include local and international equities, commodities, and property. On the income side, fixed interest, cash and infrastructure are common examples. Private capital markets across a range of assets have grown in prominence.
One asset type that is sometimes neglected is bonds, which are far more diverse than just picking up some Australian Government Treasuries. You can select bonds in quality corporations or structure a bond portfolio to take advantage of a global, regional or local thematic you want exposure to, like technology or healthcare. They also present opportunities for currency exposure.
International bonds, both government and corporate, offer a source of income and potential capital gains, as well as a way for investors to achieve geographic and sectoral diversity.
No matter how a portfolio is constructed, an important consideration is that asset allocation is a dynamic process, rather than being ‘set and forget’. That’s because the original allocation split will typically become skewed as better performing asset classes account for more of a portfolio than originally intended.
Don’t time markets
While it’s tempting to stick with a winner, assets will perform differently over time. Yesterday’s winners may not be tomorrow’s winners, so there’s a case for taking profits and restoring the originally intended asset split.
Investors’ asset allocation may also need to be adjusted over time to suit different stages of their life. Generally, as you get older your portfolio will become more risk averse, to protect the wealth generated by compound interest and smart investing.
A well-constructed portfolio, initiated by asset allocation, will help avoid mistakes or rash decisions, and will aim towards long term goals rather than short term hunches.
To discover more call 1300 683 106 or email us on investordesk@nab.com.au
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