The Role of Bonds in a Portfolio - Adviser Investments

The Role of Bonds in a Portfolio

November 22, 2021

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:*

* * * * **

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.

Disclaimer: This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Our statements and opinions are subject to change at any time, without notice, and should be considered only as part of a diversified portfolio. Mutual funds and exchange-traded funds mentioned herein are not necessarily held in client portfolios. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

You may request a free copy of the firm’s Form ADV Part 2A, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. We do not provide legal or tax advice, nor sell insurance products. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Always consult an attorney, tax professional or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

© 2021 Adviser Investments, LLC. All Rights Reserved.

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.