Broker Check

Bonds and Your Portfolio

Brett Cole, AIF®, CFP®, RICP® 

Financial & Investment Specialist

Given how low interest rates are, why would I want to have any bonds in my portfolio?

One of the main reasons that investors own bonds in a portfolio is that they produce current income.  But given the current state of our economy, the interest rates being paid on bonds are at historic lows. However, besides paying current income, high quality bonds do have other very important roles in a balanced portfolio.

Diversification from a volatile stock market. The simple concept here is that you don’t want to have all of your eggs in one basket.  By owning a percentage of high-quality bonds in your portfolio, you are adding to your overall diversification and reducing your portfolio volatility.   When the stock market is in a volatile period, high quality bonds have historically done well. Notice I say high-quality bonds, because these are the types of bonds that hold up well when the market is down.  Other types of bonds like high yield bonds may pay you more income, but they can behave much like stocks and decline significantly during difficult economic periods.

Preservation of capital.  When you can’t afford to lose money, you want to own the highest quality bonds such as U.S. Treasury bonds.  These bonds are backed by the full faith and credit of the U.S. government. With U.S. Treasury bonds, your principal values can fluctuate up or down based on the current interest rate environment, but you are guaranteed to receive your interest and principal at the maturity of the bond. 

Inflation protection.   Inflation can significantly erode purchasing power over time.  While owning stocks for the long term can be very good at providing protection against inflation, there are certain types of bonds that also can provide inflation protection.  They are called a Treasury Inflation Protected Security (TIPS).  These types of bonds have values that are linked to an inflation index such as the consumer price index.  When the index rises, so do the value of the bonds.

Each investor is different. Some investors may want more inflation protection and less current income.  Some investors may want the maximum current income that high yield bonds offer while giving up some of the diversification benefits of high-quality bonds.  But nearly all of investors can benefit from one or more of the benefits that bonds can still offer in a portfolio. 

If you would like to have a personal discussion about a bond strategy that meets your objectives, please feel free to contact us at 610-251-0670 to schedule a conversation!