It’s tough being a bond these days.
With 5-10 year interest rates near generational lows, bonds do not look very attractive. They lack pizazz and are largely ignored by the financial media. Bonds can be confusing and hard to understand. When you consider your bond investments and their lackluster returns, do you wonder why you own them?
On the other hand, stocks are exciting! They’re diverse, interesting and unpredictable, and their market performance has crushed bonds over the last 10 years(1). The financial paparazzi cannot get enough of stocks. Perhaps it’s time to boot bonds from the party. They drag everything down, from their owners to portfolios’ performance. Who invited these bonds, anyway?
Well, we did – for several reasons -and we’re confident you’ll appreciate their unique characteristics.
So let’s hear it for bonds! They may not be the life of the party, but high-quality bonds know their role and are a way to keep the party going while minimizing pain the next day. One way to reduce stock market risk is to extend your time horizon. High quality bonds extend our time horizon. We do not invest in bonds because we believe they will be the best performing asset class on average and over time. We invest in bonds to buy us time to participate in the best performing asset classes. You have likely heard or read the edict, “It’s time, not timing, that builds wealth.” Bonds buy us time.
Brian Krause, CFP®
1 From 2009 – 2018 the Barclays Aggregate Bond had a 3.52% average return over the 10-year period. Large Cap Stocks represented by the S&P 500 Index, which measures the performance of the large‐cap segment of the U.S. equity universe had a 13.65% average return. Mid Cap Stocks represented by the Russell Midcap Index, which measures the performance of the mid‐cap segment of the U.S. equity universe had a 15.05% average return. Small Cap Stocks represented by the Russell 2000 Index, which measures the performance of the small‐cap segment of the U.S. equity universe had a 13.04% average return. International Stocks represented by the MSCI EAFE Index (Europe, Australasia, and Far East), which is a widely followed index of common stocks from 22 developed market countries had a 7.40% average return. Emerging Markets represented by the MSCI Emerging Markets Index, which measures the performance of stocks in emerging market countries had an 11.53% average return.
This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.