The Role of Bonds in a Portfolio - Adviser Investments

The Role of Bonds in a Portfolio

graphic of chairman dan wiener and text stating "the role of bonds in a portfolio"

With yields below 2%, do bonds still play a role in an investor’s portfolio? And are investors becoming too complacent? Here’s what Chairman Dan Wiener said in our latest webinar,  Booster Shots, Market Shocks and the End of Fed Intervention:*

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Dan Wiener:

I fear investors are becoming a little complacent, throwing some of their caution to the wind and adding risks to their portfolios before the risks become apparent.

Why do I think this? Well, there’s been a lot of recent interest in bitcoin and the new bitcoin futures ETFs, SPACs (special purpose acquisition companies), meme stocks and leverage strategies where investors borrow money against their portfolios to boost their potential gains. All of these, to me, are signs of excessive risk-taking. I don’t believe you need to take extraordinary risks to become wealthy. I do believe, however, that if you take extraordinary risks, you have to accept the fact that you risk extraordinary losses. And I think a little bit of math shows you what I’m talking about. While a 10% loss only requires an 11% gain to recover from, a 20% loss requires a 25% gain and a 50% loss requires a double, or 100%, return.

Many commentators flagged the fact that both stocks and bonds fell in September. The correlation may leave the diversified risk-aware investor in a bit of a pickle. If bonds aren’t going to protect you from falling stock prices because they’re falling as well, what’s the value in owning bonds in the first place?

Remember, bond prices and yields are inversely related: When yields are falling, as they were for about 40 years, bond prices go up. But when yields are rising, as they’ve done over the past year or so, bond prices fall. So while bond prices may be falling, and bond mutual fund prices with them, the yields offered by newer-issue bonds are rising. And they can compensate for some—and sometimes all—of a fund’s price decline, particularly as you extend your time horizon. Also, while bonds have enjoyed a remarkable tailwind over the past four decades, I’ve never been a believer that wealth is created by investing in bonds. But wealth is protected by investing in bonds. With that caveat, I’m not going to give up on bonds as a shock absorber in a diversified portfolio.

Click here for a replay of Booster Shots, Market Shocks and the End of Fed Intervention. Please contact us at (800) 492-6868 to learn more about comprehensive wealth management solutions.

*Webinar recorded after the market closed on Wednesday, October 20, 2021.

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