I have a confession to make. I put bonds in clients’ portfolios regardless of the client’s age. Yes, I know all of the fancy marketing material that gets passed out by the 401k guy at work says that young people should be footloose, fancy free and risk averse. But when the stock market is tanking day after day, or has a case of manic depression, even the young, risk averse people are happy that at least something isn’t tanking.
I take some heat for my affection for bonds through thick and thin. Some clients wonder why the darned things are in their portfolios when stocks are trouncing every other asset class out there. The short answer to that, as alluded to above, is that sometimes stocks will go from darlings to dogs and you’ll be happy to see at least some green ink instead of all red. My peers, and other financial professionals have questioned my decision to hold bonds on quite a few occasions since the Great Crash of ’08. I’ve been told that they are due for a “come uppance crash” in the worse kinda way, besides with all of the debt our country is in why would you hold U.S. Treasury related securities? Of course every time I’m told this the stock market crashes and the bonds hold down the fort until the next recovery, earning their mid 2% to mid 3% yields the whole time, both of which pretty well outdo anything one might earn on a CD at the local banks. Besides America’s debt, while bad, isn’t nearly as bad as some of the other countries in the world, especially some of the European ones.
Now that I’ve made the case for my bond holdings, why hold them? I mean of course besides hedging a wild riding stock market. Bonds, like dividend paying stocks, and real estate, deliver a steady stream of income into the portfolio regardless of whether or not there is appreciation. The steady stream of income bonds provide seems to have less fluctuation in either direction than stocks are real estate which tend to oscillate from very generous to non-existent. Bonds, dividend paying stocks, and real estate also seem to peak and trough at different times and through different markets, providing some degree of non-correlation to the steady stream of income which is always a good thing. Bonds have primarily two enemies, both of which can be accounted for.
The two enemies of fixed income investments are inflation and deflation. With inflation, the dollars that the income flow bonds provide buys less stuff which is where the I-Bonds (known as TIPS or Treasury Inflation Protected Securities) fit the bill quite well. In the case of deflation, cash is king and the price of stuff falls which is where regular bond funds holding treasury securities works well. I cover all my bases by holding both. While I don’t mind holding corporate bonds as a “satellite holding” they are too prone to correlation with stocks to be one of my base holdings, because when the economy gets heartburn and affects companies’ stocks, it also affects their ability to pay their bondholders.
Bonds will never be the “trophy wife” of a portfolio, but they’re far more likely to be of service “in sickness and in health.” If you don’t have bonds in your portfolio, consider making a home for them in their somewhere.