By Michael Foster
If you’re anything like me, you can’t wait to read new and exciting material on the bond market! If you’re not like me, it’s probably good to have a basic understanding of the role of bonds in a portfolio.
As a refresher, bonds have historically been less volatile and had lower returns than stocks but have offered higher returns than just holding cash. Bond prices and yields (the annual net profit you expect to earn) have an inverse relationship. As yield falls, prices rise, and vice versa. We use them in portfolios to act as a ballast or volatility dampener to stock and real estate investments.
It’s been a rough year for bonds relative to their historical numbers, and August was another tough month. But let’s take a look at July for a moment. Many were predicting continued pain for bonds after a .75% rate hike by the fed on June 16th, but that’s not what happened. In July, the US bond market returned 2.44%, and the global bond market returned 2.55%.*
This just reiterates my belief that it’s extremely difficult (if not impossible) to predict prices, investor reactions, and what will happen in markets. I believe the best way to achieve investment success is to have an allocation you’re comfortable investing in over many years.
*Bloomberg US Aggregate Bond Index and Bloomberg Global Aggregate Bond Index (hedged to USD)