Tag Archives: Diversification

Why would anyone own bonds now? There are at least five reasons | MarketWatch

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Published on www.MarketWatch.com: Aug. 4, 2020 at 12:52 p.m. ET

By Ben Carlson

Bonds play a role in an investment portfolio, even amid historically low interest rates

What’s the better performer 2020 year to date — the red-hot Nasdaq 100 index of tech behemoths (Apple, Microsoft, Amazon and Alphabet, etc.) or boring, old long-term bonds?

The Nasdaq 100 ETF QQQ is up an astonishing 25.5%. But the long-term treasury ETF TLT is up 27.3%. Surprisingly, long-term bonds are outperforming tech stocks.

Yet, according to Deutsche Bank, we’re now experiencing the lowest government bond yields in well over 200 years:

Fixed income assets, such as bonds, typically provides regular cash and lower volatility when markets hit turbulence.  And, bond prices often are uncorrelated to equities. Stocks typically do well in periods of economic growth, whereas bonds typically do well in periods of declining economic activity and recessions.  Additionally,  bonds offer downside protection and moderate upside potential as investors tend to seek out the safety of U.S. government and investment-grade corporate bonds amid stock market uncertainty.

Many investors have been saying for years that bond coupon rates and yields can only go up from here, and yet, they’ve done nothing but fall more. And maybe they’ll fall even further and possibly go negative like in Europe and Japan (something we should not rule out in the U.S. if the pandemic worsens).

But eventually short-term movements in rates will wash out and the long-term returns will be based more on the current bond yields. When you consider how paltry those yields are, investors in fixed-income are guaranteed to see minuscule returns from here over the long haul.

So why own bonds at historically low yields? Some reasons:

  1. Bonds hedge stock-market volatility
  2. Bonds can be used to rebalance
  3. Bonds can be used for spending purposes
  4. Bonds protect against deflation
  5. There are other asset class options, but there aren’t many

Although bonds and bond funds have done extremely well in 2020, the bottom-line regarding bonds and bond funds…you can either earn less income from low yielding bonds to better protect your capital or earn more income from dividend paying stocks to accept more risk in your portfolio.

Read the entire opinion article at: https://www.marketwatch.com/story/why-would-anyone-own-bonds-now-there-are-at-least-five-reasons-2020-08-04

References:

  1. https://www.fidelity.com/insights/investing-ideas/bond-funds-portfolio-protection

Asset Allocation Strategy

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Asset allocation is designed to help an investor take short-term fluctuations more in stride.

When you divide your money among a variety of asset classes — stocks, bonds, real estate and cash — you can potentially smooth the ups and downs of financial markets. Diversifying your investments within the major asset classes and investment styles can help balance out a portfolio.

Asset allocation enables you to own a wide selection of investment types to potentially benefit when one asset class does well and limit the downside when another asset class does not. Once you create an asset allocation strategy as part of your comprehensive financial plan, it helps to keep a long-term perspective when the inevitable financial market volatility occurs.

It’s important to note that asset allocation and diversification do not ensure a profit or protect against loss. However, it makes sense to remember your long-term financial plan and asset allocation strategy, and stick with it, no matter how great short-term economic challenges may seem.

A long-term commitment to your asset allocation strategy doesn’t mean you shouldn’t take action during periods of uncertainty. The key is taking the right action. You may discover the original percentages you allocated to different asset classes and types of investments are not in sync with your strategy due to shifts in the market.

Your portfolio may be overly concentrated or under-represented in one area. If so, you can reallocate your assets and ensure your long-term asset allocation strategy is back on track.

Of course during times of market volatility and economic uncertainty, many investors are tempted to move out of stock investments, into the safety of cash positions. Yes, cash is an asset for investors, but understand that you earn nothing with this asset class…no return from cash.

As a result, investors tend to stay on the sidelines until financial turbulence settles, but this may be a costly mistake. One thing previous recessions and bear markets have taught us is that life goes on. In each of the most recent five bear markets since 1987, sell-offs and correction were ultimately followed by economic and market recoveries.

Thus, once stock markets unexpectedly rebound, as they typically have done in the past, you may end up getting left behind during what could have been a good opportunity to benefit from market rapid recovery and gains.

We live in a world fraught with headline risk and conflict, something that will be ever-present. This fact will always be an integral part of the investment landscape. Those who exit or try to “time the market” tend to miss a significant rally. Those who remained invested or rebalanced towards equities tended to boost their returns during a market rally.

The length of time an investor is in the market can make a difference in the amount they will save and invest to potentially grow their investments. If you sell assets while the market is declining, you risk missing upward trends that have historically followed. If you want to retire someday, start saving and investing now. It takes decades of long-term financial planning, saving and investing to get there. 

Always remember…

Learning to manage money. You need to learn and understand core principles of financial planning — long-term investing, risk management, diversification, asset allocation, retirement, estate and tax planning.

Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

All investments involve risk including loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

References:

  1. https://im.bnymellon.com/us/en/individual/articles/letter-from-the-lion/spring-2020/stick-with-a-plan-in-uncertain-financial-markets.jsp