Bonds – A Lone Bright Spot
The past week has been one of the most volatile on record. The stock market has been in freefall following the sweeping tariff announcement last Wednesday. Every diversified investor, whether aggressive or conservative, that is exposed to some stock allocation is down. It’s during moments like these that you need diversification to work. And it is.
However, the past few years have been historically bad for bond investors, with rising interest rates resulting in a negative total return over five years.
The first significant leg down came in 2022 when inflation started peaking and the Federal Reserve raised interest rates aggressively. The recovery has taken much longer than most anticipated – including myself. During this time, many market pundits started calling for an end to bonds in diversified portfolios. For a few years, they seemed to go down when the market went down and go nowhere when it went up. Why not be 100% in stocks if you’re taking the risk anyway?
That has all changed recently. Investors have poured into bonds as stocks sold off (down 17% from the high). On most days when the stock market is plunging, bonds are steady.
For balanced investors, it pays to own bonds in moments like these. $1mm invested just in the S&P 500 at the starts of the year would be worth about $865k, while a balanced portfolio of 60% SPY and 40% AGG would be worth $930k.
Neither is particularly enjoyable. But if you will withdraw from your portfolio over the next few years, it’s nice to have a place to draw from that isn’t down.
Despite recent turbulence, there are compelling reasons to stay invested in bonds:
Attractive Yields – With the 10-year Treasury yield stabilizing in the 3.75%–4.25% range, investors can lock in higher yields than in previous years.
Lower Short-Term Rates – Cash-like instruments may become less attractive if the Fed continues cutting rates, making intermediate-duration bonds a better alternative.
Portfolio Stability – Bonds still serve as a crucial diversification tool, helping mitigate stock market volatility.
Bonds remain valuable in a well-diversified portfolio, even after a tough stretch. Staying patient and positioning for rate cuts could benefit fixed-income investors in the long run.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.