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Investing Specialists

How Much Foreign-Bond Exposure Do Retirees Need?

Currency fluctuations add an extra layer of volatility.

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The European debt crisis took a toll on many world-bond funds in 2011, with the average fund in the category gaining less than half as much as the Barclays Aggregate Bond Index. (Granted, most domestically focused bond funds also underperformed the BarCap's 7.8% return in 2011.) The typical fund in this group has more than half of its portfolio in European bonds, so few emerged from the recent crisis in the eurozone unscathed. The average world-bond fund lost about 1.2% in 2011's third quarter, and unhedged funds that emphasized European bonds fared much worse than that. (Some world-bond funds hedge their foreign-currency exposure, meaning they use currency futures to negate foreign-currency effects on their portfolios' results; their returns capture their bonds' performance, not currency fluctuations.)

The recent travails of world- and emerging-markets bond funds have me wondering how big a role foreign bonds and bond funds should play in a portfolio, particularly for preretirees and retirees who are steering ever-larger sums to fixed-income securities.

Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.