Is it smart to buy bonds over stocks?
Unless you are extremely risk averse or depend on a steady stream of income for your daily expenses then it may not make sense to buy bonds instead of stocks. The stock market historically outperforms bonds over the long run.
But bonds offer a degree of safety — particularly during times when investors are nervous about the broader economy, earnings growth and stock market valuations. Look no further than the fourth quarter of 2018.
“It’s common for folks to look at bonds as a ballast at times when stocks aren’t doing as well,” said Eddy Vataru, senior portfolio manager of the Osterweis Total Return Fund, which invests primarily in investment grade bonds.
“For the average investor, fixed income can serve an important function,” he said.
Rates won’t stay low forever
Bonds may seem like a losing bet right now since yields are so low.
Interest rates around the globe have only gone up slightly from 2008 financial crisis levels, and the Federal Reserve seems content to keep rates on hold for the remainder of this year.
That’s why bonds don’t make sense for everyone, according to Alan Adelman, senior fund manager at Frost Investment Advisors.
“With interest rates still close to historic lows, you have to ask yourself where or why you should invest in bonds?” Adelman said. But he thinks a mix of less risky investment grade corporate bonds and shorter-term Treasury bonds makes sense.
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Adelman said if you’re under the age of 40, you’d mainly want to own a small percentage of bonds — maybe about 20% of your portfolio.
But he said that allocation should steadily move higher as you approach retirement. By the time you are 65, it’s a good idea to have at least half of your investments in fixed income.
Karen Harding, a partner in charge of the private wealth team at NEPC, also thinks bonds need to be a key part of any diversified portfolio. They can help you sleep at night during rocky times for the market.
“Investors should own some bonds,” she said. “There are many attributes that make bonds attractive. They are not as volatile day-to-day and they can give you a nice, stable return.”
And rates inevitably should start heading higher again if the US economy continues to show resilience.
Corporate bonds can be a less risky way to invest in companies than stocks. After all, if a company finds itself in severe financial stress, bondholders have more legal rights than owners of the stock.
“What you get from a bond is a legal claim. If a company goes bankrupt, creditors are likely to get something back while stockholders usually get wiped out and get nothing,” she said.
Still, even conservative investors shouldn’t ignore stocks in favor of bonds entirely.
What’s the best way to invest for the long haul? Are gold and bitcoin safe bets? Do you have questions about how to build wealth? Ask us here and you may be included in a future column.