The importance of bonds

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High-quality bonds still serve an important purpose in most investors’ portfolios even in a low interest rate environment. This lesson was reinforced after the market plummeted in March 2020.

While preaching portfolio diversification with both stocks and bonds has become a cliché, investors experienced the benefits of this approach earlier this year. In March, when the S&P 500 fell over 12%, investment grade bonds were down only 0.6% during the same time period.

A simple diversified portfolio with just 60% in U.S. large cap stocks and 40% in investment grade bonds would be down a more modest 7%. Minimizing volatility also reduces panic selling, which is one way to help all investors stay the course of investing for the long term.

Owning high-quality fixed income provided a psychological benefit by minimizing volatility, which helped investors keep their emotions in check. It also gave investors a buffer from which to withdraw money if their income was reduced due to the state of the economy. Since bonds fluctuate much less than equities, they could sell a bond, instead of their stocks at steep losses, to help make ends meet.

Finally, bonds also provide attractive rebalancing opportunities that may improve one’s return over time.

The benefits of own bonds in one’s portfolio can help keep investors on track toward achieving their financial goals despite the tumult in the markets.

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