We are not stock jocks.
And though I reference the stock market a lot in my writings and YouTube videos, there is significantly more to financial planning and portfolio construction than stocks.
Bonds are another primary component of many investment portfolios.
They can be forgotten or written off as boring.
But last year was a good reminder of how un-boring they can be. Bond prices were down significantly in 2022 due to interest rate increases.
The chart above—using an aggregate index—shows a decline of as much as -17% in ’22.1 That hurts if you thought you had a “conservative” bond allocation.
They are not only un-boring to the downside though. The chart above from JP Morgan provides perspective. It shows why bonds can be an essential part of a portfolio. They have had many good years and have only been negative 5 out of the last 47 years.
This is not surprising given what the Financial Times called the "greatest bull market in modern history."2 The article indicated that this bull market followed the multi-decade deflationary response to the high inflation of the 1970s and ended in 2021 when the Federal Reserve sharply raised rates.
Therefore, one should go back even farther to get more data than the bull market period. Visual Capitalist did and shows that 100% in bonds averaged about 5.3% from 1926 to 2019.3
One of the most highlighted benefits of bonds is that they are generally less volatile than stocks. This can be appealing to some investors. According to JP Morgan’s chart, despite averaging an intra year decline of around 3% for bonds, stocks average of a decline of around 14%.
After the recent interest rate increases and the performance of the stock market the last few decades, some are arguing for the current attractiveness of bonds.
Here is Jeff Gundlach, who some have called the Bond King (though he’s not crazy about the title), at a recent event giving his positive assessment of the bond market:
The stock market bottomed in 1982 and it topped—it looks like—in early 2022. Maybe it has something to do with the interest rates going from 14 to zero and maybe with interest rates rising it creates much more competition. Right now the competition that bonds give stocks is one of the highest in any of our lifetimes in terms of the risk premium on bonds versus the risk premium on stocks, in terms of the yield on bonds versus the yield on stocks. And that I think is going to be an issue for 2024.4
The takeaway here is not to argue that Gundlach’s guess is spot on—after all, bonds are what he does, and I don’t give investment prophecies—but to remind you not to forget the importance of diversification in a portfolio.
Bonds aren’t considered as sexy as stocks nor do they get near as much press, but sometimes a little less pizzaz can be vital for investors.
1. Guide to the Markets (3Q 2023) (p. 45 of 71). Accessed online: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
4. DoubleLine Capital YouTube Channel on stage at Future Proof Conference on 9/12/23. Accessed online: https://youtu.be/p2_es3vCJqc?si=R0F28Fee1_EjAwhP