Why I Own Bonds

Dennis Friedman

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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