over 3 years ago • 3 mins
Thanks to central banks’ efforts to support their economies, bond yields in most rich countries are close to all-time lows. Investors have traditionally bought bonds in search of a steady return – but if that return is practically zero then what’s the point? Here comes fund management giant Pimco with some timely tips on how these steady-eddie investments can complement the racier parts of your portfolio.
Bonds are hardly the sexiest investments. By buying a bond, you’re lending money to a company or government. And they’ll pay you a regular coupon as a thank you – as well as (hopefully!) returning your original investment at the end of the bond’s term. The bond market is much, much bigger and older than the stock market – but nowadays it doesn’t get half the media coverage.
So, given all that, why bother allocating any of your investment pot to boring old bonds? Why not just keep the “safe” part of your portfolio as cash in the bank? Well, a report this week from Pimco crunched data from the past 20 years to argue that bonds’ tendency to move inversely to stocks – rising in price when stocks fall and falling when stocks rise – provides an excellent stabilization on returns.
According to Pimco’s figures, a portfolio of 60% stocks and 40% bonds returned roughly the same over the past two decades as a portfolio solely invested in stocks. But, crucially, the 60/40 portfolio was less “volatile” – its value swung around less – than the 100% stocks portfolio. So its risk-adjusted return was much better.
Similarly, a portfolio of 60% stocks and 40% cash was roughly as volatile as the 60/40 stocks/bonds portfolio – but its absolute returns over the period weren’t quite as good.
“Yes, rates are low, but we believe the defining features of core bonds – diversification and return potential – continue to make them a critical component of a well-balanced portfolio,” Pimco argues. “Rates could still go lower in a negative growth scenario when equities and risk assets underperform.”
Just bear in mind that Pimco’s one of the world’s biggest investors in bonds, so it’s only natural they would want you to consider them…
Despite Pimco’s big-up for bonds, other investors think their strong gains in recent years – driving yields to record lows – leaves them unattractive.
Consider a warning from Deutsche Bank this week, for example, that the increased supply of money from central banks may one day trigger a bout of inflation – hitting bond prices hard.
And check out Goldman Sachs’ latest asset allocation report, released on Friday, which gives an underweight (UW) rating to government bonds and a neutral rating to company bonds (a.k.a. “credit”). The investment bank prefers stocks, arguing that they look decent value considering its “bullish, above-consensus” outlook for the economy.
Still, as Pimco’s analysis shows, over recent decades it’s paid to have a fair chunk of your investments in bonds. As always, the question is whether that’ll continue to be the case in coming years.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.