Why I Own Bonds

Dennis Friedman · Nov 16, 2021 · 5 replies

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.

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5 Comments

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a1maverick

4 years ago

That stock tumble in Q1 of 2020 was closer to 30%.
I hope the canary in the coal mine is not the bond market. Best of luck and hopefully retirees escape any
major damage on the horizon.

-1

4 years ago

Reply to a1maverick

The 30% drop was from the February peak, not the start of January.

parkslope

4 years ago

Bonds have better yields than MM, savings and CDs because they have higher risk. Thus they aren’t necessarily the best fixed-income option.

Last edited 4 years ago by parkslope

Jack Hannam

4 years ago

I appreciate your logic as to why one would hold onto bonds they already own. What are your thoughts regarding someone with a large cash position who might wish to own bonds but is reluctant to buy at this time, given their price and likelihood of falling in value once yields climb? Would you wait, or start buying now, using dollar cost averaging?

Andrew Forsythe

4 years ago

Well said, Dennis. There really aren’t a lot of great alternatives right now (aside from I Bonds with their low maximum amounts). And No Penalty CDs can sometimes be a decent choice.

But I’m likewise holding on to my bond funds and ETFs, at least until a better path presents itself.

Last edited 4 years ago by Andrew Forsythe

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