The Role of Bonds in Your Portfolio

Are you relying too heavily on bonds in your portfolio? The role of bonds in a portfolio has typically been to dampen volatility within your investment holdings but overusing them can be detrimental to meeting your long-term financial goals. For investors, all you need to achieve your financial goals is the right combination of stocks, bonds, and bills but do not forget about the erosive impact that inflation has on your real investment return. Too many investors flock to the safety of US Treasury Bills and Government Bonds but are they really providing safety? Overexposure to any asset class can be harmful but being over-allocated to bonds can delay your progress toward meeting your goals, especially if you stay invested in them for too long.

From 1926 through 2021, S&P 500 stocks, long-term corporate bonds, long-term government bonds, and Treasury Bills have had average rates of return of 10.46%, 6.94%, 4.92%, and 3.28%, respectively. Adjusted for inflation, those returns would be 7.35%, 3.92%, 1.96%, and .37%, respectively. Retail investors are notorious for overusing bonds and bills as staples in their asset allocation, particularly as a choice in their 401(k) type plans. Foundations, pension plans, and endowments tend to lose sight of the fact that they are the ultimate long-term investors and place too much emphasis on fixed income investments rather than equity. In addition, these organizations employ money managers who typically do not add value after fees and would be better off building internal staff to take a simpler approach using the right combination of index funds to accomplish their goals. Too often these organizations, along with retail investors, overreact to short-term events and seek safety in the wrong asset classes.

So, what is the solution? Keep it simple and do a proper asset allocation study. The results would indicate that sticking with the right long-term asset allocation between stocks and a combination of fixed income investments would be better than constantly reacting to short-term news and events and changing asset allocation decisions. With this data, investors would be able to have greater confidence that their investment plan can stay the course under any circumstances when properly rebalanced. Although tactical asset allocation sounds appealing, it calls for consistently predicting short-term market direction. Strategic asset allocation is more realistic as it relies more on longer-term market trends which are more predictable. Also, whether the long-term is predictable or not, the fact is that equities provide the best growth over the long-term and should play a significant role in your final asset allocation decision.

Using bonds to stabilize your investment returns is great but when an investor constructs a sound equity investment strategy, they significantly boost their investment returns well beyond those typically provided by stock-based index funds alone. The key is to build a portfolio focused on investment fundamentals as we do here at Investoristics. An all-equity portfolio, if constructed properly, can provide the downside protection investors seek without the need to invest heavily in asset classes like bonds that are inferior as a long-term investment option. Our approach, having survived the Covid-19 crisis and 2008 monetary crisis with impressive results, provides significantly higher returns than any stock market index with a lower risk profile. Discover the benefits of building a solid portfolio using our unique approach. Consider contacting us today to find out more about our investment strategy.