Let’s Talk About Bonds

June 30, 2023

Bonds typically aren’t high on the list of things investors want to discuss when talking investments. Bond discussions tend to get a little complicated, involve jargon, and frankly just aren’t as interesting as stocks. But, like going to the dentist or the DMV, the conversation can be necessary.

To state the obvious, 2022 was an awful year for investors all-around. Stocks (as measured by the S&P 500 Index) declined 18%, their worst year since 2008. Bonds, typically a less volatile asset class than stocks, added to the misery by losing 13%, their largest decline on record. This meant that nearly every type of portfolio, ranging from very aggressive to very conservative, was dealt a major blow in 2022.

Most clients are aware that stock investing has its good years and bad years, and you have to “roll with punches”, so to speak. But bond performance in 2022 felt more like a sucker punch to investors. Why? A long and boring track record of mostly positive returns. In fact, over the past 42 years, bonds declined in value only 4 times (as measured by the Bloomberg US Bond Aggregate Index). And, of those 4 years when bonds did decline, the worst year (1994) was down only 2.9%! To lose 13% as bonds did in 2022 was almost unthinkable. It was truly a strange year.

All this matters as it relates to the concept of portfolio rebalancing. If you fast forward to now, the end of June 2023, stocks have rebounded ~15% YTD and are up over 20% since October (technically a bull market). Bonds meanwhile are only up a meager +2% YTD—no wonder investors feel even less inclined than usual in talking about them. But that’s probably why we should. Like many markets, the best years tend to follow the worst years (just not necessarily immediately). 2022 was a stark reminder of the phrase “bond yields up, bond prices down”. And while it was incredibly painful for 2022 bond investors, the flipside is that bond yields have risen to levels not seen in 15 years. Portfolios just haven’t seen this type of investment opportunity in long time. Does this mean we think it makes sense to materially shift portfolios from stocks to bonds? No. But, considering the run equity has gone on, do we think it makes sense to rebalance portfolios back to their target allocation (trim equities, buy bonds)? Yes, we do. This is the type of rebalancing that has been shown to help investors achieve their financial goals (with less volatility) over the long run.

Bonds are subject to availability and market conditions; some have call features that may affect income. Bond prices and yields are inversely related: when the price goes up, the yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.