Why Bonds Are Still Solid Choices For Investors

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Why Bonds Are Still Solid Choices For Investors

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Original Article: US News & World Report:   |   Written By: Lou Carlozo

 

These days, certain investments boast glamor and appeal. For weeks, it seems, pundits have obsessed over stocks and the Dow Jones industrial average. Bitcoin may be on the bum end of a downward spiral, but certain folks still swoon over it. Then there’s the bond. For some it conjures images of Aunt Bessie handing you a $20 savings bond that, after 10 years, was worth a measly $17. For others, bonds carry all the appeal of a bet on the eight-track tape industry. And for aggressive investors lulled into thinking this bull run will never end, bonds seem, well, stupid. In the candy store known as Wall Street, they might as well be the stale marzipans in Aunt Bessie’s living room. “It’s a combination of FOMO – fear of missing out – the thrill of the moment, investors lacking the discipline to stick to their true lifestyle objectives and forgetting that investing is about blocking and tackling, not throwing the long pass all the time,” says Robert Isbitts, founder and chief investment strategist at Sungarden Investment Research.

Thus to say bonds have no place in a sensible portfolio is akin to ignoring one of wealth’s most time-honored wealth principles: balance. “While bonds may not be exciting and yields are low, you’ll be thankful you have them during a financial tsunami,” says Jon Ulin, managing principal of Ulin & Co. Wealth Management, a branch of LPL Financial in Boca Raton, Florida. One time-honored practice is creating a 60/40 portfolio, signifying the ratio of stocks to bonds. “Over the past 17 years, it’s returned 6 to 7 percent per year, about the same as the S&P 500 with significantly less risk,” Ulin says.

“The balance of stocks and bonds in a portfolio is a risk decision,” adds Todd Jablonski, chief investment officer of Principal Global Investors and based in Seattle. “As a risk-based investment manager, we tend to blend our stock and bond positions to establish a neutral risk level. This is our strategic target over the long-term; our true north in the portfolio.”

“I recommend, as do others, that one have approximately your age as a percentage in low-risk securities which include bonds,” says Charles Higgins, associate professor of finance at Loyola Marymount University in Los Angeles. “One might raise that percentage by say 10 percentage points if you want to sleep well or lower it by again say 10 percentage points if you want to eat well.”

In general, bonds serve three primary purposes in portfolios: “to generate income, preserve principal and dampen the volatility of other asset classes,” says John Donaldson, director of fixed income at Haverford Trust in suburban Philadelphia. “The bond market has offered historically low yields for several years and the equity market has experienced low volatility at the same time,” Donaldson says. But for investors in a pinch, dumping equities could amount to a big mistake that violates the fundamentals of buy-and-hold investing. Moreover, bonds have as much variety as stocks – and who among us would confuse, say, new penny stocks with shares in Bank of New York Mellon Corp. (NYSE: BK), whose roots date to 1784 and Alexander Hamilton? “Ultra-high net worth investors are likely to continue to be in tax brackets above 30 percent – and will therefore still make heavy use of municipal bonds,” says Eric Kelley, executive vice president, director of research and fixed investments at UMB Bank in Kansas City. And for those in lower tax brackets or investing in IRAs and foundations, “corporate bonds have been a very popular alternative.”

Some bond befuddlement comes when bonds make the news, usually in the form of U.S. Treasurys. Last week, 10-year Treasurys did hit a four-year high of 2.944 percent. But compare that to, say, Microsoft Corp. (MSFT) and its stock price jump of 42 percent over the last 12 months; MSFT trades at $92 a share. Yes, but remember those two free falls in the 2000s? Experts like Gene Tannuzzo do. He’s the senior portfolio manager at Columbia Threadneedle Investments in Minneapolis, which manages about $178 billion in bonds. “The S&P 500 lost 22 percent in 2002 and 37 percent in 2008,” he says. “Having exposure to 10 year U.S. Treasury bonds would have provided a nice offset, with positive double-digit returns in both years: 11.8 and 13.7 percent respectively.” By way of analogy, when high-flying stocks nosedive, bonds can provide the safe, smooth landing gear. Or if you prefer, “It’s analogous to a plane with a single engine versus two engines,” says Loreen Gilbert, founder and president of WealthWise Financial Services and an executive board member of the National Association of Women Business Owners. Yet bond contrarians contend that investors need to think twice. “Bond yields are broken and bonds should be limited in use,” says Benjamin Halliburton, chief investment officer at Tradition Capital Management in Summit, New Jersey. Because of the low-interest rate environment, “It appears the days of driving portfolio income by investing only in U.S. Treasurys and investment-grade corporate bonds are at an end, at least for now,” Halliburton says.

What’s an investor to do? Consider bond investments in progressive intervals, says Jason Ware, co-founder, managing director and head of municipal bond trading at 280 CapMarkets in San Francisco. “The best way to leg into exposure in the bond market with the curve so flat is to buy bonds on the front end of 10 years, and ladder your principal exposure starting one or two years from now,” Ware says. Maybe that sounds downright dull in a bonkers-for-bitcoin world. “Plain vanilla bonds tend to be boring to some investors,” says Robert Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. “That is, when investing in high-quality bonds you receive your expected interest payments on a periodic basis, and you are paid your principal value when the bond matures.”

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