Why Own Bonds?
“Everyone has a plan until they get punched in the mouth” – Mike Tyson
This famous Mike Tyson quote rings true to all investors, especially in light of the increased volatility in the market. Everything is easy when the stock market is going up and bonds seem like a losing proposition, until you get punched in the mouth. Bonds are meant to under perform stocks over the long term. The point is they are there when times get nasty and we have market volatility, very much like insurance. When the market is going up, you don’t really think about bonds until you need them. The important thing is that you plan ahead for volatility whenever it hits, and owning bonds is a great way to do that.
Bonds are part of our process. This piece isn’t suggesting everyone should own bonds. There are several ways to skin a cat. This piece is to make investors aware of the benefits of owning bonds and why they work for us.
Bonds tend to rise when stocks fall
Bonds are a great diversifier for your portfolio, period. It’s an asset class that we use in portfolios to mitigate volatility. Bonds are used as a foundation. The yields can be quite low (government bonds pay under 1% and corporate bonds pay around 2%-4%) but we can count on them to outperform when markets get ugly. If fact, long term treasuries have actually outperformed the S&P 500 over a 6 year period (see above).
Bonds give our clients optionality
Bonds give us the option to protect capital, but also to re-deploy capital when we feel it’s an attractive risk/reward to buy stocks. Having available capital to buy high quality stocks (if it suits the individual) that are down is another reason to own bonds.
Bonds let our clients (and us) sleep at night
Preservation of capital is huge for us. Our clients need to know that their money is safe and the best way we can do that is own bonds.
Remember – not all bonds are created equal. There are high yield bonds on one side of the spectrum that have more credit risk and on the other side of the spectrum you have government bonds with very little yield but give you upside in a down market. If you have any questions regarding how to construct a bond portfolio please reach out to Team Woo for a free consultation.