In conversation with clients through the years, I’ve heard this statement over and over, "You can't make money in bonds.” They would say that bonds could not possibly produce a high enough return. (Pause) “High enough return for what?” I would probe.

Not only are bonds useful for short term needs, but provide investors with an asset class that has had far less fluctuation than the stock market. Less fluctuation creates more certainty. Side note: I believe there’s a link between certainty and sanity. Yes, bond prices fluctuate in the secondary market, but high quality bonds return investors principal in full so long as they do not default.

Bonds are not for everybody. Adding the asset class to your portfolio must be informed by your investment objectives and account for your unique financial situation. That said, historically, investors have made money in bonds. For folks who are living off of their investments in retirement or saving for near term expenses,  bonds have been a critical component to assuring their goals are met while maintaining their sanity. 

We investors, we hope that a stock will be above the price we paid for it when we need the money. Listen; hope is not a sound investment strategy and bonds can lower your dependence on a wishful mindset.

Some Stats on Bonds
September of 1987, the 30 year Treasury bond was yielding an over 9% annual coupon, a rate that was guaranteed by the United States Treasury. When the S&P 500 index was down 37 percent in 2008, the Bond Market (Barclays U.S. Aggregate bond index comprised of approximately 17,000 bonds) was up 5.24 percent. It needs to be said that bond market has not always been puppies and rainbows. Between 1980 and 2017, investors saw negative returns in 1994, 1999, and 2013. That said, the average annual gain (not the annualized total return) over the period was a respectable +7.87 percent.

For many, if not all, of our clients, bonds are a portion of their portfolio. The ratio of stocks to bonds varies by client age and various personal objectives. Bonds provide a relatively predictable range of returns and can do one other thing: provide investment sanity.

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Barclays U.S. Aggregate Bond Index data source: (external link)
https://www.thebalance.com/stocks-and-bonds-calendar-year-performance-1980-2013-417028

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.