Good Financial Reads: All About Bonds

If you’re like me, you’ve accumulated a tidy stack of those cool-looking Series EE bonds over time.  Mine came from occasional gifts from my grandparents, and payroll deduction programs from my first couple jobs.  And, if you’re like me, those bonds are long-gone, used to purchase a 1978 Chrysler Cordoba (hey, I was a sucker for ‘Corinthian Leather’.)

But if you’re NOT like me, you might still have the stack of bonds, whether in a shoe box in the closet, or a safe deposit box at the bank.  What should you do with those?

Inflation is becoming a hot topic in economic circles. Three rounds of stimulus checks and economic support are pumping enormous amounts of money into the American economy. In response, long-term interest rates have risen from all-time low levels. This brings up an important topic for investors: How do we manage interest rate risk in bonds?

Understanding how changes in interest rates affect your bond investments is important. Clients look towards their bonds as a source of income and stability. But bond prices can move up and down, just like stocks.  Thus, it’s important to understand why bond prices might move up or down.

I've been getting this question a lot lately: "why should I hold bonds in my portfolio?" And as is the case with any question that (a) is a good one, (b) I've been asked a lot, and (c) I'm likely to get asked again in the future (probably even decades from now!), it's worth talking about at length. Hence: this article!

The primary argument I hear is this: "Interest rates are low. The Fed has made it clear that they're likely to stay low. Given this, why should I hold bonds?" So...why?

You may have heard that now is not a good time to invest in bonds. With low interest rates, you don’t get much of a return. Plus, low rates today mean interest rates can only go up in the future, and you can expect bond prices to fall when interest rates rise.  Some investors and analysts have declared death to the 60/40, a traditional portfolio allocation with 60 percent in stocks and 40 percent in bonds, and suggest replacing bonds with alternative investments for diversification. 

The reality is that we don’t know what future bond returns will be. So before declaring death to bonds, it may be a good idea to unpack the statements above, and distinguish myth from reality.

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