Bonds: What Are They Good For?

With bonds yields currently at historic lows, I am reminded of the 1970’s hit song “War” by Edwin Starr, where he asked, “War, what is it good for?” and his reply, “Absolutely nothing!” As difficult as it is to appreciate bonds, let me attempt to make the case that bonds, even with a seemingly bleak short/near term future, are still “good for something.” Below are three important attributes of bonds all disciplined investors consider:

Diversification:

Say what you will about bonds, but one thing they are not is stocks. While bonds yielding less than 1% do not sound appealing, I would direct your attention to the year to date performance of stocks vs. bonds on March 23, 2020, when the stock market was at its recent lows. At that time, while most broad bond market indices were down 1-1.5% year to date, the stock market was down 35%. While bonds may not be as good a hedge as they were ten years ago, they still provide diversification and protection during periods of deflation and extreme downside stock market volatility.

Liquidity:

When managing money, a huge consideration is the ease in which one can exit a particular investment and redirect those resources towards other pursuits. Whether it is an ongoing cash flow need, unforeseen expenses such as new cars, roof leaks, etc., or to simply rebalance your portfolio back to a target asset allocation and take advantage of down markets, liquidity is a must! If your asset allocation is 100% stocks or you are tied to illiquid assets such as real estate, private placement investments, etc., it will be challenging to meet these immediate cash flow needs or take advantage of better investment opportunities.

Income:

While bond yields/income are currently below historical norms, they still offer better opportunities than most checking/savings accounts, money market accounts, and short-term C.D.s. If you are more concerned about preservation of capital than income, look towards short term bonds with high credit quality (i.e., U.S. treasuries and other bonds backed by full faith and credit of the U.S. government). If your goal is more income, look to longer duration bonds or those with less credit quality (i.e., corporate bonds, international bonds, etc.).

Remember, this time is no different than any other time! Be disciplined with your investing and be willing to give up some upside potential in your portfolio to protect against downside risk. Disciplined investors do this is through well thought out exposure to bonds, even in environments like we currently find ourselves. If you have questions, seek professional guidance from a Certified Financial Planner who can help you plan and manage your investment strategy.

 

Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the money Tuesday segment.

Fox 6 Talking Points:

  • Diversification
  • Liquidity
  • Income

 

Marshall Clay CFP, JD, is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.

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