You have reached your limit of free articles this month.

Enjoy unlimited access to myAJC.com

Starting at just 99¢ for 8 weeks.

GREAT REASONS TO SUBSCRIBE TODAY!

  • IN-DEPTH REPORTING
  • INTERACTIVE STORYTELLING
  • NEW TOPICS & COVERAGE
  • ePAPER
X

You have read of premium articles.

Get unlimited access to all of our breaking news, in-depth coverage and bonus content- exclusively for subscribers. Starting at just 99¢ for 8 weeks

X

Welcome to myAJC.com

This subscriber-only site gives you exclusive access to breaking news, in-depth coverage, exclusive interactives and bonus content.

You can read free articles of your choice a month that are only available on myAJC.com.

Wes Moss: Do bonds still belong in your portfolio?


Pity the poor bond, always runner-up to stocks. We refer to “stocks and bonds,” never “bonds and stocks.” Nobody brags at the watercooler about their smart bonds picks.

And, now, bonds are starting to face an even bigger PR problem.

And like a lot of PR problems, the bad headlines may be unfair.

The current upward movement of interest rates has some investors reconsidering bonds. Why? Because interest rates and bond prices move in a seesaw pattern. Rates go up; bond prices fall. This eternal truth has even the most risk-averse folks asking me whether they should get out of bonds.

My answer: Everybody be cool! Yes, these nasty headlines might say it’s time to dump your bonds; but consider the following before making any sudden calls to your financial advisor.

Will interest rates actually continue to rise? Rates have moved steadily upward since this past summer’s historic lows, but they could linger at current levels for some time.

Bonds react differently to rate changes: There are about a dozen bond varieties, all of which react to rising interest rates in unique ways.

Bond stability: Bonds can provide significant price stability when compared to stocks.

I want to address each of these issues, but let’s start with a primer on bonds. Bonds are simply interest-paying IOUs issued by a company or government. When you buy a five-year bond for $10,000, the seller is using the $10,000 for that specific term, while at the same time paying you annual interest. At the end of the term, aka the bond’s maturity, you get your $10,000 back. Over the whole term, you’ve collected $500/year (5 percent on $10,000) in interest. Assuming, of course, that the issuer doesn’t default on the bond.

Bond default rates vary widely depending on the type of bond. U.S. government bonds are the gold standard of credit. Corporate bonds also generally have a low probability of default, with the average default rate of less than 1/2 of 1 percent over the past 50 years. High-yield or junk bonds are, well, riskier. They have an average 20-year default rate of 3.9 percent.

Will rates actually continue to rise?

At the start of 2014, economists widely believed rates would increase over that year. In reality, rates fell. Such wrongheaded predictions have been common since 2010. I’m not suggesting rates won’t go up from here (10-year U.S. government bonds are yielding roughly 2.5 percent), but predicting interest rates and the fate of the bond market has proved over time to be just as fruitless as predicting the exact peaks and vales of the stock market.

Not all bonds are created equal

A 1 percent rise in interest rates will have very different effects on different bond categories. For instance, very long-term bond prices (30-year U.S. Treasuries) will typically fall 18 percent when interest rates rise 1 percent, while floating rate bond prices normally stay virtually flat during a 1 percent interest rate rise.

Bond stability

Boring ol’ bonds offer a price stability that few other asset classes can provide. A bad month for stocks might mean a 17 percent tumble. A horrific month for bonds could result in a 2.4 percent dip, as we saw in November 2016, the worst month for bonds in 12 years. The right categories of bonds can help dampen wild portfolio swings, regardless of the interest rate environment. Reducing those swings is important, given that knee-jerk, emotional decisions — usually spurred by market dips — are a leading cause of lost portfolio value.

Think about this: Going back to 1950, the best year for the S&P 500 was a positive 47 percent, while its worst year’s performance was a negative 39 percent. A portfolio made up of 50 percent stocks and 50 percent bonds registered a 33 percent gain in its best year, but its worst year was down only 15 percent.

But the main reason we own bonds is for the interest income they generate. Currently, government bonds yield between 1/2 percent and 3 percent, while corporate bonds pay between 2 percent and 4 percent, and high-yield bonds offer 4 to 6 percent per annum. This may not sound like a lot, but over a decade, those small percentages can add up to significant returns.

So, with interest rates rising, do bonds still have a role to play in your portfolio? For retirees who like stability and a generally consistent return, the answer is likely yes. Bonds might not get the spotlight too often, but just as Batman needs Robin to help protect Gotham City, your stocks need bonds to help protect your portfolio.

Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than seven years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.

DISCLOSURE

This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.



Reader Comments ...


Next Up in Business

AT&T moving entertainment jobs out of Atlanta
AT&T moving entertainment jobs out of Atlanta

AT&T is moving several hundred jobs out of metro Atlanta and shifting them to Los Angeles and Dallas. The company confirmed Thursday that it plans the transfer but declined to offer details or to explain the reasons. “Our Entertainment Group will be moving a few hundred managerial jobs from Atlanta to Los Angeles and Dallas,” Lance Skelly...
Info on Home Depot customers exposed (but no financial data)
Info on Home Depot customers exposed (but no financial data)

 A spread sheet listing about 8,000 customers, along with their transaction and a range of personal information, was posted for an unknown amount of time, on a Home Depot web site. No financial data was part of the list, which did not compare with the 2014 data breach in which hackers installed software that provided them with personal and financial...
Home Depot under fire over lead paint removal
Home Depot under fire over lead paint removal

Home Depot faces investigations and fines for a series of cases in which its contractors mishandled lead paint removal in at least three states. Three federal agencies have said they are looking into the actions of contractors working for the Atlanta-based home improvement giant in Connecticut, Maine and Colorado, an issue first reported by WSB-TV...
Atlanta unemployment down: 7 ways to pretend you know what you're talking about
Atlanta unemployment down: 7 ways to pretend you know what you're talking about

The metro Atlanta unemployment rate fell in March to 4.6 percent from 4.9 percent in February, the state Labor Department reported Thursday.  After seven years of job growth, the metro jobless rate has fallen back below the level of Dec. 2007, the month that the Great Recession began. Since hitting bottom, the economy has added 489,000 jobs...
Time to get a good night’s sleep
Time to get a good night’s sleep

You’ll really appreciate a good night’s sleep after using the Sound+Sleep Suite from Adaptive Sound Technologies. The audio sleep device provides the right amount of ambient noise with natural sounds for the perfect shut-eye environment. Technology called Adaptive Sound, which uses a built-in microphone that allows the volume to adjust...
More Stories