There has been a lot of talk in the financial world lately about bonds. Given the attention now being focused on bonds and the worry that seems to be building, we are going to talk about bonds today and next week. We have some good, solid research to bring you which I am sure you are interested in hearing.
Bonds are usually seen as the boring part of a portfolio, the part of the portfolio you buy for safety and security. People get excited about stocks. Stocks are about growth and appreciation. But bonds? Bonds are fixed income producers and something your grandparents advise you to buy. Only Bill Gross talks about bonds, and he has to because he runs the largest bond portfolio in the nation.
But now, bonds are the center of attention. Bond prices will crash! The “bond bubble” will burst! Bonds are unsafe! If you spend any time reading financial commentary, chances are you have seen a headline like this. So what is an investor to do at a time like this?
We look at the facts and we look at hard data. Yes, when interest rates rise, bond prices fall. The two are inversely related. Does that mean the bond investor is doomed in a rising rate environment? Absolutely not. Notice I said bond investor, not bond trader. There is a big difference.
Historically, the largest interest rate increase in American history was in the late 70’s to early 80’s. Some of you will remember that time. During that time, however, bonds did not have a year with a negative total return. Another interesting bond fact: the worst year on record for the bond market was 1994, with a total return of -2.92%. [Source: Johnson Investment Council]
One more fact: Rising rates actually improve intermediate to long-term bond returns over time. For the long-term bond investor, rising interest rates are actually a good thing. Next week, I will provide you with the details on that research; I know you will want to see the numbers.
In the meantime, I will leave you with this thought: as long-term investors, we accept short-term modest declines in order to realize greater long-term positive results.
Ann P. Wiesbrock, CFP®
Originally written 06/2013