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Bonds and More Bonds

Jonathan Clements  |  November 17, 2015

STOCKS GET ALL the attention, which seems a tad unfair. The value of bonds worldwide is some 35% greater than the value of all stocks—plus many other parts of our financial life look suspiciously like bonds. How so? Think about all the streams of steady income that folks collect.

We pull in interest from bank products like savings accounts and certificates of deposit. We collect Social Security retirement benefits. If we’re lucky, we are the recipients of a traditional employer pension plan. Most important, we have our regular paycheck.

The more we receive from paychecks, pensions, Social Security and other bond-like streams of income, the more risk we can take with our investment portfolio, by tilting toward stocks. At times of stock market turmoil, when we’re feeling unnerved, we should focus not only on the money we have in conservative investments, but also on the various streams of income we collect. The key question: How long could we go without being forced to sell shares? In all likelihood, it’s many years, if not decades—which means there is no rational reason to fret over the stock market’s decline.

Our financial life doesn’t just include many bond-like streams of income. We also have negative bonds, otherwise known as our debts. While bonds pay us interest, our debts cost us interest. Typically, our debts charge us a higher interest rate than we can earn by buying bonds, because we’re considered less creditworthy than, say, the U.S. Treasury or IBM. One implication: It often makes sense to pay down debt rather than to purchase bonds, because the interest payments we avoid are greater than the interest we could have earned.

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