Should You Stop Investing in Bonds?
Bonds are having a rough start to the year, which goes hand-in-hand with rising interesting rates and high inflation. In fact, it’s one of the rougher starts for bonds in a very long time. So why should anyone remain invested in bonds?
Well, as Jason Zweig put it in a recent Wall Street Journal article, “If your recent losses make you feel like bailing out on bonds, remember why you own them. Bonds aren’t meant to make you rich; they keep you from becoming poor while paying you some income along the way.”
For centuries, bonds have been a time-tested method for earning interest in a way that has less volatility and risk than stocks. The worst calendar year for long-term bonds in the last century was -17% in 1980. The worst years for the S&P 500 were -38% in 2008 and -47% in 1931. Investors put money in bonds because even when disaster strikes, the worst-case scenario is a walk in the park compared to stock market crashes.
In the long-run, bonds will likely never out-perform stocks. More risk = more return. That’s the fundamental premise behind any investment. But that’s why we spend so much time talking to our clients about risk. If your portfolio has more risk than you can stomach during times like these, the temptation to throw the long-term plan out the window and panic will start creeping in. That’s why we invest in bonds, even when market conditions are not ideal for short-term returns. Forfeiting some return to keep risk at a level you are comfortable with is well worth the price paid.
And the good news looking forward? Higher interest rates on bonds means higher bond income. Since the end of 2021, yields on the aggregate bond market have doubled. These rising rates are a promising sign of better returns down the road for bond investors.
Sources:
https://www.wsj.com/articles/its-the-worst-bond-market-since-1842-thats-the-good-news-11651849380
https://www.macrotrends.net/2526/sp-500-historical-annual-returns
Investing involves risk including loss of principal. No strategy assures success or protects against loss. Content and opinions voiced in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Bonds are subject to credit, market, and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.
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