Your Portfolio Still Need Bonds

Investors got a wake-up call recently as prices fell on their "safe" assets—bonds.

Interest rates are still in a historic low range, and bond returns are likely to be lackluster over the next decade or so—in sharp contrast to the bull market in bonds we experienced over the past 30-plus years.

But instead of dumping bonds wholesale or trying to time purchases and sales around interest-rate movements, long-term investors would do well to backspace a moment and ask themselves why they own bonds in the first place.

For most buy-and-hold investors, it's primarily for ballast—to counterbalance the volatility of stocks. It's not to shoot the lights out—though investors can be forgiven for being confused on this point, since for a generation the average yield of the Barclays U.S. Aggregate Bond Index topped 7%, a rate that was high enough to both insulate a portfolio from stock losses and boost returns.

Going forward, bonds probably won't contribute nearly as much to your portfolio's overall return, but they're still likely to function as effective shock absorbers—provided you stick with a diversified portfolio of high-quality, investment-grade bonds or bond funds.

Bonds blunt losses in a bear market and bonds' downside protection will probably remain.

For the total-return investor who reinvests interest distributions, lower bond prices are somewhat offset by higher yields and potentially higher returns going forward.

Of course, you also should consider using some certificates of deposit and money markets for a portion of your "safe" holdings.  But cash tends to underperform both stocks and bonds following a rise in long-term interest rates.

Source:  Carolyn Geer, Wall Street Journal

D2 Capital Management uses a variety of bond mutual funds and bond managers to maximize diversification in our client accounts.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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