With rates on the rise and inflation stubbornly high, what’s the appropriate allocation to bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. for your portfolio? What about cash? Here’s what Vice President and Portfolio Manager Steve Johnson said in our recent webinar, Booster Shots, Market Shocks and the End of Fed Intervention:*
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Your allocation to bonds is a personal decision that you should be making with your portfolio executive based on your financial plan. There’s been so much written about the death of the 60/40 portfolio (60% stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company., 40% bonds). Whether you should be 80/20, 60/40 or 70/30 is your decision based on how much riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. you want to take. And, obviously, it hasn’t been a great year for bonds.
But remember, a bad year for bonds is a 2%–3% decline; a bad year for stocks, as we saw in 2000–2002 and 2008, is a 50% decline.
Can you take a decline of 20%–30%? Don’t forget, those bonds in your portfolio are designed as a shock absorber to help withstand those large drawdowns. Of course, different bonds do better or worse in different environments. This year, with rates moving up, long-term Treasurys haven’t done as well as high-yield bonds. High-yield bonds tend to do well when the economy is recovering, and that’s been the case in 2021.
But I would stress that you don’t want to abandon bonds just because the market has reached all-time highs. Maybe next year, maybe in two years—at some point, we’re going to experience turbulence in the markets. And you want to have an anchor in your portfolio during times of stress. We know that Treasury bonds can provide real ballast in a portfolio.
It’s the same with cash. I know there have been some smart people like Ray Dalio and Larry Fink from BlackRock who say “cash is trash.” I don’t think that’s the case.
Remember, you’re going to have to take distributions from your IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. if you’re over 72. You obviously want to maintain some cash so you can meet those requirements and avoid having to sell during a downturn. Cash is at 0% right now, so perhaps we would look at ultra-short-term bonds or some other options—but it’s never right to completely abandon bonds or cash.
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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