The Importance of Bonds in Your Investment Portfolio
Over the last 9 years the US stock market has made an incredible run. Stock investors have been rewarded greatly and have seen gains in their qualified and taxable portfolios. Multiple factors have contributed to this bull market. These include:
- Lower tax rates both corporate and individuals
- Historically low unemployment
- A strong economy and corporate earnings
- A Federal Reserve which has kept interest rates low (until recently)
All of these factors have increased confidence in the economy and optimism on the outlook of markets. Historically stocks have outperformed bonds during long periods and with the current strength and optimism in the economy, why should investors consider bonds or fixed income securities in their portfolio?
History shows us that good times don’t last forever and there are many reasons why investors should examine bonds if you haven’t done so within your portfolio. A few points to consider:
Bonds act as a cushion within a well-diversified portfolio. When stock market volatility occurs, by having an allocation to bonds or fixed income securities, you help reduce risk and help lessen downturns in the market.
Income is another very important aspect of investing in bonds. Bonds and bond funds generate income on a regular basis and many investors use that income to help aid their cash flow needs, particularly in retirement.
With all the positive news on the economy which I mentioned above, interest rates are also on the rise. Bond prices and bond yields have an inverse relationship. Currently, interest rates are rising and that has put pressure on bond prices. However, there is a silver lining to a rise in interest rates which leads to a higher yield or income stream for investors. The majority of returns in bonds are primarily made of the yield it can generate. So long term investors will benefit from higher interest rates because of the increased income their portfolio will generate in the long run.
The amount of bonds in your portfolio should depend on a number of factors such as your age, retirement horizon or time horizon, and your risk tolerance. Working with your Biltmore Capital Financial Advisor we can help determine an appropriate level of bonds in your portfolio. We at Biltmore believe investors should never stretch beyond their risk tolerance or take on more risk than is require for meeting their financial goals.