Bonds Get An A+ Over The Past 40 Years
Bonds play an important role in most retirees’ investment portfolios today. Why? Because if a retiree’s “nest egg” was 100% invested in stocks, they would not have time to recover from another 58% pullback like we saw from 2008 – 2009 or a 30%+ pullback like we saw during the COVID crisis of 2020. Clients need and want some type of stability in their investment portfolio during periods of poor stock market returns, and bonds have been that answer over the last 40 years. Bonds do not always increase in value, but high-quality bonds have proven to be a “ballast to the ship” during times of negative stock market returns.
We have been of the opinion for a long time that one of the keys to a successful retirement is steady and consistent income. Looking back, bonds have helped many of our clients meet their retirement income goals.
Interest Rate Cycles
Interest rates typically work in 30 to 40 year cycles. Over the last 40+ years, interest rates have moved lower. Randy loves telling the story of the first condo he purchased in Houston back in the mid-80’s with an 11% mortgage interest rate – and that was a good deal! Compare that to the 2.5% rate I locked in when I refinanced my home earlier this year.
We are of the opinion that this interest rate cycle (i.e. interest rates moving lower) is closer to the end of its life than the beginning. How much lower can interest rates go? As we write this, the 10-year U.S. Government bond is yielding approximately 1.60% which is higher than when we started the year. While there are still some negative interest rates in other parts of the world, interest rates here in the U.S. are considered “low” when looking back at history.
Even though interest rates have been trending lower since the early 1980’s, there have been short periods when interest rates have risen and negatively affected the price of bonds. Remember that interest rates and bonds move in opposite directions.
As you can see below, the orange column shows the negative price movement of bonds during short periods of rising interest rates. What does this mean to you? Traditional bonds will lose value during periods of rising interest rates.
Bond Investing Moving Forward
We are of the opinion that “what got us here will not get us there.” This means our approach to bond investing has to change moving forward if we believe interest rates could move higher and move bond prices lower.
For the past few years, we have been positioning client bond portfolios to be more interest rate agnostic. This means we have taken a lot of the “interest rate risk” out of the portfolio. We have done this by favoring credit risk over interest rate risk and also by owning shorter-term fixed income. For example, we own floating rate bonds, preferred stocks, mortgage bonds, and other income-producing assets that are not as sensitive to the change in interest rates.
The bottom line is this… we believe that you need to understand what you own and have an active investment process for the fixed income portion of your portfolio moving forward.
About the Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 10 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes that everyone needs a wealth coach!
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