Buy bonds or bye bonds?

When I entered the investment business in the late 80’s the 30 year U.S. Treasury Bond was yielding above 8%.  Investors were reluctant to buy these bonds for fear of locking up their money for 30 years at 8% because they were convinced that interest rates were going higher.   These investors remembered the double digit yields from 1979 to 1984 and they were confident that interest rates would once again touch double digits.   Twenty five years later investors are still waiting for interest rates to rise. 

Today, with rates at a fraction of where they were 25 years ago, investors are once again focused on rising rates.   Investors are reluctant to buy bonds yielding 2% or 3% for fear of missing a rise in rates so they keep their money in cash or a money market with a near 0% yield waiting for their day to pounce on the first Fed move.  Even though rates are low, investors should not ignore the safety and income that bonds can provide to an investor’s portfolio. 

In the October 1, 2015 issue of Fortune Magazine Mr. Joshua M. Brown of Ritholz Wealth Management outlines a compelling case for owning bonds.  Mr. Brown suggests a portion of your portfolio should be allocated to bonds to help “cushion a portfolio for down years.”   He adds that stocks and bonds have only had three times where their returns were both negative – 1931, 1941 and 1969.   He suggests that readers should ladder their bond portfolio which will help investors with “a built in-defense mechanism against a gradually rising interest rate.”   

I agree with Mr. Brown.  Bonds should be added to portfolios to help protect investors against a falling stock market.   A well-constructed bond ladder can also help investors with both rising and falling interest rates. 

In fact, if we look at the stock market drops of 2002 and 2008 bonds performed very well.   In 2002 when large cap stocks dropped 22.10%, long term bonds were up 17.84%.  In 2008 stocks were off 37% and bonds were up 25.87%. (Source: 2015 Ibbotson ® SBBI ® Classic Yearbook, Morningstar ®)

So, I would recommend giving bonds another look.  

Bye, bye and buy bonds.

Bill Parrott, CFP® is the President and CEO of Parrott Wealth Management in Austin, TX.