Why I Own Bonds
, 12:54 pm ET
SOME INVESTORS TODAY are avoiding bonds because rising interest rates could cause the price of bonds to fall. I’m not one of them. Bond funds continue to play a significant role in my investment portfolio. Here are eight reasons I’m sticking with my funds:
- This isn’t a good time to sell. Bonds have already factored in the market’s expectation that rates will rise. Interest rates have climbed this year, causing a decline in bond prices. It may be too late to gain any benefit from changing my asset allocation.
- There’s no better fixed-income alternative. Bonds have better yields than money market funds. Certificates of deposits have liquidity issues—there’s a penalty for early withdrawals. That penalty can mean forfeiting all the interest you’ve earned.
- Today’s higher bond yields mean greater interest income.
- Even if interest rates continue to rise, reinvesting my interest payments allows me to take advantage—and should boost my returns over the long term.
- Having bonds in my investment portfolio is a good way to reduce volatility and risk. When stocks fell almost 16% from January through March 2020 because of the COVID-19 pandemic, bonds worldwide returned just over 1%.
- I’d rather own a bond fund than buy individual bonds. I’d have to own a large number of bonds to achieve the diversification that I get with my bond funds. Also, it would take a lot of time and effort to research and manage those individual bonds.
- As a retiree who depends on his investment portfolio for income, an all-stock portfolio would be too risky.
- Maybe most important, thanks to my bonds, I sleep better because I’m less bothered by the ups and downs of the stock market.