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Ted
With many market strategists predicting higher-interest rates, the case for owning bonds is getting more and more difficult to make. Here are five reasons to own bonds—even in a rising-rate environment.
Source: Brian Rehling, chief fixed income strategist at Wells Fargo Advisors
1. Performance:
Although the years of strong fixed income returns appear to be behind us, that does not suggest that significant losses are on the horizon for disciplined bond investors. Even in a rising-rate environment, a well diversified-portfolio is likely to provide positive returns. Simply put: investors may need to adjust their return expectations for bonds.
2. Diversification:
A wise investor would think twice before eliminating an entire asset class. The foundation of modern portfolio theory suggest that having a well-diversified mix of major asset classes (stocks, bonds and cash alternatives) provides a buffer in changing market environments
3. Less Volatility:
Moving investments into an asset allocation model expected to generate higher returns is likely to increase volatility in your portfolio. While losses are possible in fixed income positions, they are generally less severe than the downside seen in equity markets.
4. Yield:
Investors receive different yields depending in part on the maturity of the bonds they purchase. Rather than simply selecting a longer-maturity bond to receive the highest possible yield, first consider the marginal benefit in moving out further on the yield curve.
5. Income:
If you are able to anticipate when you may need cash for a big purchase down the road, buying bonds with a maturity near the time when you'll need the money can be an effective way to stay invested in the markets while maintaining some assurance that your funds will be available when you need them.
