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I’VE SPENT THE PAST 10 years or so without any bonds or bond funds in my portfolio. What am I missing? And why did this happen?
Investing in bonds directly was always confusing to me. There are coupon rates, bond ladders, bond ratings and so much more. In the beginning, I just found it easier to ignore all the confusion. I know that bonds, in aggregate, represent a greater investment pool than stocks, but I just kept putting it off.
Somewhere between 2010 and 2015, I finally had time to learn more, but what I learned put me off further. The facts didn’t compel me. At that time, bonds didn’t provide an attractive return, and there was little prospect of things improving. In fact, they got worse.
Aggregate bond indexes have been slightly negative for the past three calendar years, and they’ve averaged just a 1.1% average annual return over the past 10 years. That’s less than the 2.6% average inflation rate over the same period. With bonds, I’d have been investing to lose money, since I view the inflation rate as my breakeven point. And so, I kept putting off bond investing.
Meanwhile, most financial advisors continue to push a balanced portfolio, with a default setting of 60% stocks and 40% bonds. Faced with this advice, I do have fear of missing out, or FOMO, given the relative safety that bonds can provide. The stock market could collapse at any time, after all.
People consider a market correction to be a drop of 10%, and a bear market to be at least twice that—20% or more. Since my returns in the stock market have averaged more than 10% a year for the past 10 years, my bond-free portfolio would still be quite a bit ahead, even if there was another stock bear market. Your experience may differ and, as they say, past returns are no guarantee of future results.
That leaves me still wondering: What about adding some bonds?
These days, bond exchange-traded funds (ETFs) will comfortably eliminate all those educational hurdles I had with bond ladders, ratings, coupon rates and the like. And, just like stocks, total market bond index funds, which are passively managed, compare quite favorably to actively managed bond funds, especially given their lower management fees.
What’s more, it doesn’t take long to find the biggest, cheapest and broadest-based bond ETFs by using search engines and fund screeners. Here are four of the biggest bond ETFs on the market today:
If I wanted to own bonds tomorrow, I’d buy one of these. If I was in doubt, I’d probably buy the biggest—Vanguard’s bond ETF—or maybe the fourth one, which is Schwab’s offering, since Schwab is my primary broker.
They would all perform about equally well and, if it helped me sleep better at night, bonds would be worth buying. If you’ve found some other good bond funds, your recommendations are welcome in the comments section.
For now, though, I’m going to stick to stocks, with a tilt toward large, stable, dividend-paying companies. I’ll completely avoid all debt securities—not just bond funds, but also loaning money to family or trusted friends. But that’s another story.
For the moment, I’m content with my bond-free portfolio. With inflation running hot, the gap between inflation and the current yield on bonds, whether government or corporate debt, remains uncompelling. I don’t mind missing out on these safe—but negative—returns, relative to inflation.
Right now, my bond FOMO is comfortably low. Though I may not sleep well tonight, it won’t be a lack of bonds that keeps me awake.
Steve Spinella is an international Christian ministry worker. He and his wife Laura have been married for more than 40 years. For more of Steve’s writing, check out his blog. His previous article was Trial by Fire.
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My favorite example that makes this point is that, for the 40-year period from 1969 through 2008, the S&P 500 Index returned 9%, and so did 20-year Treasury bonds. Making matters worse, while producing the same returns as long-term Treasuries, the S&P 500 experienced far greater volatility—its annual standard deviation during the period was 15.4% compared to just 10.6% for Treasuries.
That equities could underperform Treasuries for 40 years surprised many people, but it shouldn’t have. No matter how long the horizon, there must be at least some risk stocks will underperform safer investments.
There is indeed a risk that stocks underperform safer investments — otherwise it wouldn’t be risk. Still, when I hear such examples, they strike me as a tad disingenuous. We’re talking about comparing the broad U.S. stock market to one Treasury security. Many folks would have had exposure to the broad stock market over that 40-year stretch. How many folks would have owned 20-year Treasurys and then presumably rolled their money into a new 20-year Treasury at the beginning of each year?
There have been significant periods of time, 30-40% in total over the last 100 years when risk free treasury bonds have outperformed stocks – just ask Larry Swedoe
So 100% of all your money is invested in stocks?
My husband and I max out our I-bond quota of 20k total every year. We also add I-bonds to our business account (10k) a year occasonally and try to get in another 5k through the tax refund route. Last year we shoveled some extra money into gift I-bonds that will be assigned over the next few years. Our I-bond ladder is the only bond exposure we own or need.
They are inflation-indexed, not taxed until we cash them out and are exempt from state and local taxes.
Coincidentally, the Feb 28 issue of the Wall Street Journal featured an article by columnist James MacKintosh titled “If History Repeats, Then It’s Time to Buy Bonds.” Some highlights from the article:
“In 1973 and 1980, stocks took a long time to recover, especially after adjusting for inflation.” A bond investor was ahead of a stock investor for 13 years after 1973, and ahead for 7 years after 1980.
This is not a prediction of what will happen today since much depends on how the economy unfolds. But it does indicate that, at todays yields, bonds can smooth out the performance of a volatile all-stock portfolio — something valued by retirees drawing down their nest egg.
It’s also important to consider that, at current yields, bonds are more reasonably priced than stocks and, looking forward, starting valuations matter.