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Should I Invest in Bonds? A Down-to-Earth Guide for Long-Term Investors. Blog250

13th May 2024

Paddy Delaney

Should I Invest in Bonds?

If you’ve got a slice of your pension or investment pie in bonds—be it individual or a fund, government or corporate—you’re in good company. Many savvy investors do, and have always done. It’s always been seen as a smart move, a bit of “financial wisdom” passed down through generations! But lately, thanks in no small part that Bonds haven’t been doing great, some are second-guessing this wisdom.

In this piece, which compliments our our September 2023, Blog 229, will explore:

  • Why should I invest in Bonds at all?
  • What’s happening with Bonds right now?
  • What has history thought us?
  • What should I do about it all?

Why Bother with Bonds?

First off, why are we even talking about bonds? Equities, even a well diversified index fund, are considered speculative. They allow ownership of the great companies of the world, and are a bet that the value of these companies will appreciate over time. Often, you get dividends, which if invested in a Accumulating Fund, will compound nicely within the fund for you.

Bonds? They’re the steady Eddies. When you buy bonds, you’re lending your cash to a company or a government, and they promise to pay you back with interest. It’s generally considered a safer bet than stocks, and if things go south, bondholders are often first in line to get their money back.

‘Burning the Bondholders’ doesn’t often happen in reality! Historically, bonds have been a comfy cushion during economic downturns, as you’ll see from Vanguard’s lovely graph below:

What’s Shaking in the Bond Market Now?

So, what’s the current bond market drama? Well, bonds are in a bit of a bear market. We last touched on this in September 2023, and, yep, it’s still a thing. The Bloomberg Aggregate Bond Index, which is a big deal in the bond world, and often quoted as a benchmark for Global Bonds is still in negative territory over recent years —its worst since it started in 1976.

Interest rates have been high, and therefore bonds are feeling the pinch. The more niche categories like zero-coupon bonds and long-term U.S Treasuries for example have even seen drops of about 60% and 40%, respectively. Count yourself lucky to have avoided these!

A Quick History Lesson

Interest rates, almost globally, rose in from c4% to c15% from mid-1960’s to 1980. A c11% rise in just 15 years, which was really something! Bonds struggled on the back for those increases of course.

But since the 1980’s, interest rates have steadily come ‘down the mountain’. But in 1980, US based research shows that yields/rates were up at 15%. You will hear people in their 60’s-80’s today tell you about paying 15% interest rates on their mortgages – imagine!

Since then, rates have descended, and prices have risen accordingly. See the below graph from Halbert Hargrove in the US, showing that ascent and descent in 10 year rates:

But right now, it’s more like choppy waters thanks to the big bad bear market stirring up trouble globally for bonds.

The bond market, typically a haven of stability, is currently navigating one of its roughest patches, largely due to the overarching bear market affecting global economies. This period has been marked by steep increases in interest rates as central banks, including the European Central Bank (ECB), adjust policies in response to rising inflation. 

Historically low rates during the pandemic have given way to rates approaching 5%, resulting in a fall in Bond prices. As rates climb, bond values generally fall, illustrating a core financial principle that is particularly poignant in today’s environment.

And when those same interest rates fall – Bond prices climb. It’s simple maths. And if Vanguard’s assessment that intermediate and long term bonds will rise by 8 and 19% respectively if interest rates fall by 1%, we’ll have forgotten all about this Bond Bear Market very quickly.

And they are also suggesting that if interest rates remain as they are that bonds will deliver c4% per year, which would be more in line with their long term averages.

Note, they do make it very clear that this is not a prediction to be relied on!…..

What’s the Game Plan for 2024?

Here’s the lowdown for navigating a bond bear market: remember, it won’t last forever! From my corner, most bond investors are keeping their cool. They get the Maths, and they’re staying rationally optimistic about the future opportunity, on this relatively small portion of their overall planning.

If you’re already in bonds, think twice before jumping ship unless something big in your life has changed. If you’re eyeing up a new investment, bonds still offer some tasty yields and opportunities that are hard to ignore. The future potential for bonds is far better than it have been for years to be frank, based on yields.

And there are alternatives if you prefer. Government bonds, and bank deposits may appeal to you. Pros and cons of each of course. And not to forget, we have seen the significant growth in Money Market Funds since bond price declines in the past few years.

A U.S example, but you can see the ‘hockey stick’ growth sourced from Bloomberg below, with assets invested in MMFs doubling in just 4 years, 2020 to 2024 ($3 to $6trillion)….

Wrapping It Up – Should I Invest in Bonds

Higher yields right now could mean better returns down the road, especially if you’re in a bond fund where things are continuously rolling over and reinvesting. This is super relevant for anyone eyeing retirement, looking to draw a steady, inflation-proof income for years to come.

So, even though the bond market is going through a bit of a storm, it’s all about keeping your eyes on the horizon. Stay diversified, stay smart, stick to your plans, and remember, every market has its seasons.

I firmly believe that as financial advisors, we should always have to explain and allay a client's fears as to why some element of their portfolio is struggling, otherwise your client isn't properly diversified!

Bonds are no different to any other investment asset, and with a bit of patience, they’ll still help you sail smoothly into your financial future with ease and confidence.

I hope this helps.

Paddy Delaney




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